To those who fear him--and there are many--John Malone inspires any number of dark images: Darth Vader, the Godfather, you name it. But as he settled deeply into his office sofa recently, hands cradling a cup of hot tea, the chief executive of Tele-Communications Inc. (TCI) looked anything but fearsome. Malone was still suffering the lingering effects of a flu that had swept through TCI's management ranks. He had spent the previous week at home, glued to the O.J. Simpson trial. "I got mad every time Judge Ito adjourned early," he joked halfheartedly. Even his smile looked tired.

It's been that kind of year for Malone. TCI has been enduring a sort of corporate flu ever since the collapse 13 months ago of its staggering $35 billion merger with Bell Atlantic Corp. The deal was to have been Malone's endgame, a rich reward for the 22 years spent building the world's most powerful cable-television company. Everyone agreed it made consummate sense: In a future where telephone companies would provide TV signals and cable companies would provide telephony, TCI and Bell Atlantic would combine to conquer.

Instead, Malone is fending for himself before a daunting array of problems. Chief among them is how he will finance the cable/telephone system of the future without access to Bell Atlantic's deep pockets. TCI already has a towering $11.5 billion in debt and its prodigious cash flow dipped 3%, to $1.8 billion, in 1994 as a result of government mandated rate cuts. Its stock, which topped 30 in late 1993, is wallowing near 21, and a complicated restructuring plan broached in November hasn't given Wall Street much cheer.

The heavy spending, meantime, has already begun. In February, Sprint Corp., TCI, and two other big cable companies laid down $2.1 billion in a government auction for licenses to provide a new type of wireless telephone service known as PCS. That covers licenses only; building the system will cost billions more. At the same time, the specter of competition from the Baby Bells and direct broadcast satellite has accelerated cable-industry consolidation, forcing Malone to use his depressed stock to go after $3 billion worth of new cable systems. Most recently, TCI confirmed it is negotiating a $600 million deal to buy systems from Chronicle Publishing Co., which would raise its subscriber base to 12 million.

But even spending money hasn't been easy. Malone recently backed the controversial partnership that tried to use a Federal Communications Commission minority tax break to purchase Viacom Inc.'s cable systems for $2.3 billion. That deal wilted when the Republican Congress moved to rescind the FCC program. Although Malone hopes to buy the Viacom systems anyway, he'll end up spending a lot more than the $600 million he first pledged. And if he uses TCI stock, he'll further dilute the shares.

DREAM DEFERRED. Then there's the Turner situation. Malone and Cable News Network magnate Ted Turner have been negotiating for months to buy out Time Warner Inc.'s 19.4% stake in Turner Broadcasting System Inc. That would give TCI, which already owns a 21% Turner stake, 40% ownership of one of the nation's hottest programming companies. Turner and Malone would then launch an effort to buy a network--most likely CBS Inc. The two-step strategy would vault them into the big leagues of Hollywood "content" providers--and offer a nice counterbalance to TCI's distribution uncertainties.

For now, however, that's a dream deferred. Malone insists Time Warner's $1.6 billion asking price is just too high. Sources close to the talks say Time Warner balked when Malone's financing included a note that wouldn't come due for a year. Also, because federal regulations prohibit a cable company--or an outfit controlled by a cable company--from owning a network, Malone and Turner would have complex control issues to hammer out before chasing CBS. Although the embers are still glowing, the talks have ceased for the moment.

Many observers think Malone simply can't afford everything on his shopping list. Bell Atlantic CEO Raymond W. Smith insists it was TCI's cash flow woes that killed their proposed merger. "After years of 8% to 10% cash flow growth, they were looking at five to eight years in which they weren't going to get any growth except for some price increases," he says. Now, he insists, TCI is crippled, doing deals with stock priced near 21 when Malone could have sold out to Bell Atlantic above 30. "It only shows how capital-constrained he is," Smith says. "I don't think TCI has the ability to wage battle."

Malone, of course, has his own strong opinions about competing against the Baby Bells (below). Indeed, he and Smith have made a sport of berating each other ever since the deal collapsed. But while the TCI chief insists he has plenty of resources, most observers think that depends on how you define "plenty." Says one well-placed cable executive: "He doesn't have a lot of dry powder, and as we move from monopoly to competition, you've got to keep your powder dry."

Financial gymnastics are Malone's trademark, and his current strategy is no different. It seems to boil down to this: Use stock--even if depressed--to continue acquiring critical mass and use leverage creatively to do everything else. That's the idea behind the recent restructuring. The plan, which is still being worked on, would split TCI into four separately traded units that would segregate the cable, programming, technology, and foreign operations. Each would have its own ability to raise debt and equity.

Malone also favors a plan whereby the Sprint-led wireless consortium would create a separate company to raise the debt and equity required for the estimated $5 billion it will cost to build their wireless telephone service. That would work to shield each partner's balance sheet. The problem is, because no full-fledged PCS system exists, nobody can say exactly how much one will cost. The level of borrowing power required is a moving target.

Consequently, Malone has adopted what TCI's Chief Financial Officer Barney Schotters calls "a walk-before-you-run strategy." TCI has laid out a modest $3.2 billion, three-year capital spending program for its cable plant that focuses the most dollars on areas where the company's systems are well-clustered--areas like San Francisco and Miami. Outlying systems are getting an upgrade, too, but won't have as much capacity initially.

FOOL'S GOLD? This will delay TCI's offering to all of its customers the galaxy of interactive services the Baby Bells and Time Warner have been trumpeting lately. But that's O.K. with Malone. He insists that market studies indicate most customers want more channels and first-run movies--not the ephemeral interactive services promised by Ray Smith. "So much of the other stuff is just bull....," Malone says.

Instead, TCI will focus on providing customers digitally compressed signals that will allow for twice as many channels and a clearer picture. Malone has spent $100 million to convert a warehouse near Denver into a 200,000-square-foot digital-TV center where signals are being compressed for satellite transmission to TCI systems.

That's Malone's plan. How all this will pan out is an open question. There is no measuring the true cost of competition. And while both the cable companies and the Baby Bells offer numbers that suggest their side will end up being the low-cost provider, that depends on any number of variables from what services customers want to how they want them delivered.

FICKLE BASE. TCI also has its ragged service record to worry about. The company has spent $100 million on new software to speed up service response time. But winning true customer confidence--the kind that leads to a competitive advantage--will take both time and capital spending. Malone admits TCI has a long way to go, and he keeps one recent episode in mind as a motivator: Last year, a local phone company in southern Connecticut began offering cable service to a small number of TCI subscribers. At one point, as many as 20% defected.

Given his predicament, mne might expect Malone to be spending most of his time in Washington these days lobbying for the telecommunications bill wending through Congress. If passed as conceived, it would sweep away many of the rate regulations that have dampened TCI's cash flow. That may happen yet, and it certainly would take some of the heat off Malone. But, he says, "I'm not holding my breath." The feisty TCI chief is used to going it alone. Why should now be any different?



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