Presiding over a meeting of his investors at New York's Hudson Theatre last September, 61-year-old cable titan John C. Malone pretty much summed up his investment strategy. "A down market," he declared, "is a point of opportunity for us." Indeed, John Malone didn't get to be John Malone by sitting on the sidelines during hard times. When Ted Turner faced bankruptcy in 1987, Malone bailed him out. It was Malone's money that early on helped to keep alive the Discovery Channel, Black Entertainment Television, and Home Shopping Network, now among the hottest properties in cable. So who is Malone looking to rescue these days? AOL Time Warner Inc., the biggest media company in the world, whose shares are down 43% this year.
Malone has been keeping a keen eye on his 4% stake in the media giant, the result of Time Warner Inc.'s 1996 acquisition of Turner Broadcasting System Inc. Back then, Malone agreed to not vote the shares or buy more of them. But with AOL Time Warner (AOL ) losing altitude, Malone's Liberty Media Corp. (L ), which takes minority positions in media outfits, asked the Federal Trade Commission in March to free it from those restrictions, which the FTC may do as early as June. Now, say sources close to Malone, it is only a matter of time before the Denver dealmaker makes his move. "I'm sure he wants a seat on the board," says one investment banker with a history of doing deals with Malone, "and when he gets it, he's going to make his voice known." The goal? Insiders say Malone will want to spin off AOL's cable systems, whose value, he believes, is being dragged down by AOL's other problems.
To get to that point, Malone would have to use some of his legendary dealmaking skills. With nearly $3 billion in cash, Malone could simply buy more AOL shares if the FTC lifts the 4% cap. But Liberty execs are also looking at other moves, say Wall Street sources, that would involve trading stakes the company holds for a larger AOL position. Malone declined to comment, as did an AOL spokesman.
According to bankers and media executives, one possible scenario involves Liberty swapping its 43% stake in shopping channel QVC--valued at $4.4 billion--with cable giant Comcast Corp. (CMCSK ), which owns the rest. After adding some cash, Liberty would then get the 25% stake in AOL's Time Warner Entertainment Co. unit (TWE) that Comcast will own if its pending deal to buy AT&T's (T ) cable system wins federal regulatory approval later this year. AOL is interested in getting back the 25% but may not have the financial flexibility right now to buy the stake, which has been valued as high as $10 billion.
If he were to get the TWE stake, Malone could then trade it for a larger share of AOL and a seat on the board. TWE includes HBO and more than 10 million cable subscribers. "[Malone] is clearly frustrated with AOL Time Warner, which he knows is worth more than the Street is giving it credit for," says Ajay Mehra, portfolio manager at Columbia Management Group, which owns Liberty shares and a small AOL stake. "If he can align his interests with [incoming AOL CEO Richard M.] Parsons--and bringing in TWE could do that--he would be an invaluable asset on the board."
Liberty executives dismiss such a scenario as speculative at the moment. And AOL has been negotiating to buy the unit from Comcast directly. AOL in the past has rejected demands by large investors for board seats--notably, Edgar Bronfman Jr., after Seagram bought a large stake in Time Warner in 1993. Moreover, says one AOL executive, Liberty's large programming holdings still make it enough of a competitor to disqualify Malone from a board role. Nonetheless, "if he gets his stake up to $10 billion, they're going to have to give him a board seat," says one cable executive. And there's no telling what kind of influence Malone and his friend and AOL board member Ted Turner, who owns 3.8% of the company, will wield then, say other media executives.
Once on the board, Malone wouldn't be shy about how to improve the company. As an AT&T board member, he provoked--and won--a fight to force the spin-off of the phone giant's cable system. He might do the same at AOL, forcing a direct sale of the cable unit to the public. As an added twist, Malone could even offer himself up to head the unit, drawing on his own years of experience running Tele-Communications Inc.
Rounding out the picture, say cable execs, Comcast would certainly be interested in taking back the 43% stake in QVC, with its strong cash flow. The timing would be advantageous, just as the cable company wants to show ratings agencies it deserves to maintain its investment-grade status. Comcast also says it has no interest in keeping the TWE stake.
Conversely, though, Malone has reason to hang on to his QVC stake. For one thing, it would give Liberty leverage in making sure Comcast continues to carry other Liberty-owned channels. A possible alternative: Sanford C. Bernstein & Co. analyst Tom Wolzien suggests that Malone could increase his AOL shares by directly swapping Liberty's 50% stake in the lucrative cable property Discovery Channel with AOL. Wolzien values Liberty's stake at $5.7 billion. "QVC and Discovery are both great assets that any media company would love to have," says Wolzien. "And they're reaching the top of their cycle, where John could get the most for them."
Trying to figure out which way Malone will turn next is never easy. And Liberty has its hands full with problems in Europe, where Malone's majority-controlled United Pan-Europe Communications is staving off bankruptcy with a big debt restructuring. In February, Malone abandoned a bid to assemble Germany's largest cable system when federal regulators asked for too many concessions on his $4.8 billion bid to buy six operators. Malone is also currently trying to buy a stake in NTL Inc., Britain's largest cable operator. As is Malone's modus operandi, he hopes to win control of NTL--and merge it with his 25%-owned Telewest Communications PLC--by paying cents on the dollar for NTL's debt.
Liberty's maneuvering in Europe is part of Malone's greater plan to become the world's largest cable operator. In the U.S., he already owns 18% of News Corp. (NWS ) and smaller pieces of Viacom (VIA ) and Vivendi Universal (V ). Nowhere have his holdings tanked as much, though, as with AOL Time Warner. For John Malone, that surely has the feel of opportunity.
By Ronald Grover in Los Angeles, with Tom Lowry in New York