The Second Empire Of John Malone

He's Mr. Cable TV. Trained as an electrical engineer, John C. Malone turned empire builder 19 years ago, when he took over a tiny Denver cable operator. Today, Tele-Communications Inc. (TCI) is a $4 billion-a-year behemoth serving nearly 10 million customers in 49 states.

TCI's chief executive is hungry for more. Now that most of the country is wired for cable, Malone has set his sights on programming. In March, 1991, TCI spun off its programming subsidiary, Liberty Media Corp. Since then, Liberty's stakes in some of the best-known cable channels have turned the company into a Wall Street favorite--and added considerably to Malone's already impressive wealth.

LEAPING STOCK. Malone, who is also Liberty's chairman, has been on a buying binge since early December. First, he made Liberty the major player in the $2 billion-a-year home-shopping industry. On Dec. 7, it paid $150 million for voting control of Home Shopping Network Inc. (HSN). Then, Malone joined forces with former Fox Inc. Chairman Barry Diller and cable operator Comcast Corp. to take control of HSN rival QVC Network Inc. The deal, which would enable Liberty to expand into such state-of-the-art programming as interactive games, is now under federal antitrust review.

In January, Malone started focusing his attention on sports. Liberty's Prime Network, a loose affiliation of regional sports stations, has made plans to combine with SportsChannel to create a nationwide network serving 41 million households. Although not yet large enough to challenge ESPN's 62 million households, Prime will be able to string together its regional coverage to sell lucrative national ads. Not bad, considering Prime Network's estimated 1992 revenues of a mere $150 million.

Wall Street certainly has noticed, pushing Liberty's stock up to about 28. That's a twelvefold increase in only 22 months--after adjusting for a recapitalization and a four-for-one split (chart). No one is happier with the stock's performance than Malone himself. He owns 22% of the company's common stock. In the past year alone, his block of 13.2 million shares has posted a $264 million gain.

Although perfectly legal, Malone's method of amassing his Liberty stake was unorthodox. According to Securities & Exchange Commission filings, Malone obtained more than half his holdings through options granted in lieu of a chairman's salary. His initial contract with Liberty entitled him to exercise only 20% of the options a year. But the company's board waived that requirement and allowed him to buy all his shares in one fell swoop. To finance the $25.6 million purchase, Malone sold his personal stake in QVC to Liberty for $100,000 and gave the company a $25.5 million personal note. He later paid off part of the note by giving Liberty some of his TCI stock.

NO COMPLAINTS. Malone, who declined to be interviewed for this story, may be enriching himself, but his investors aren't complaining. "I sure don't mind being in partnership with the smartest man in cable, especially if he has his own money on the line," says William Nygren, research director of money manager Harris Associates in Chicago, which owns 14% of Liberty's common.

Liberty's portfolio of cable channels is what sparks that enthusiasm. It owns 17% of Black Entertainment Television, along with a 50% stake in American Movie Classics and lesser pieces of The Family Channel and Court TV. The regional sports channels hold cable rights to 15 teams in the National Basketball Assn., 7 in Major League Baseball, and 5 in the National Hockey League. All told, Liberty's assets, which include pieces of 18 small cable systems, are worth about $2.3 billion, figures Donaldson, Lufkin & Jenrette Corp. analyst Dennis H. Leibowitz. That's nearly $37 a share.

The full value of those assets can't be realized unless a market exists for programming. That's where the link to TCI comes in handy. TCI payments account for some 30% of Liberty's $111.2 million in revenues for the first nine months of its current year, according to Liberty's SEC filings. And that will grow by early 1994 if TCI, as planned, expands many of its systems to 500 channels through digital-compression technology.

Liberty intends to grow to fill those channels. It has little debt on its balance sheet: The debt stays on the books of its joint-venture partners, the cable channels. "We have the resources and the mind-set to grow," says Liberty President Peter R. Barton. "We're looking at a lot of things." That should gladden the hearts of Liberty's investors. Especially the biggest Liberty investor of all, Mr. Cable TV.

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