Dismantling The Tci Empire?
For a long time, John C. Malone was the king of cable, presiding over the country's largest cable operator, Tele-Communications Inc., and its growing interests in cable networks, international holdings, telephony, and satellites.
But many in the cable industry have long regarded Malone as more of a dealmaker than an operator fascinated by the intricacies of running local cable franchises. In 1993, when Malone struck a deal to sell TCI to Bell Atlantic Corp. for $35 a share, he was at the top of his game. But that deal fell apart, and TCI's stock, at a recent 16 3/4, has never recovered. Since returning last October from a yearlong break from running the company, Malone has made several attempts to reinvigorate TCI with half-hearted strategic overhauls.
UNWIELDY. Now, Malone seems to have fixed on a plan of action: He's effectively dismantling the cable giant, spinning off programming, satellite, and other businesses and selling or handing off about a third of the company's cable subscribers. In essence, Malone is reshaping TCI to look a lot more like a manager of a diversified media stock portfolio than an old-fashioned operator of cable systems (table). "We are not dismantling this company," says a TCI spokeswoman. "We are getting smaller to be closer to our customers and give better value to our shareholders."
The company has decided that its 4,400 cable systems, with 14 million subscribers, are too unwieldy to be run well. "No one is smart enough--certainly, I know that I'm not--to manage 14 million subscribers and do it right," new TCI President Leo J. Hindery Jr. said in a recent interview. For two months now, Hindery and Malone have been busily negotiating to slice off huge groupings of TCI subscribers, so far by handing them over to other cable operators in exchange for an equity stake in that company.
On June 6, TCI struck such a deal with Adelphia Communications Corp. for systems in Ohio, Pennsylvania, and upstate New York. On June 9, TCI exchanged 820,00 subscribers in suburban New York City for a 33% nonvoting stake in Cablevision Systems Corp. "They're talking to everybody" about making a deal, says an executive with another cable company.
By unwinding the country's largest cable empire, TCI is essentially declaring a management defeat. After years of buying every system it could, TCI lost touch with its customers and was running its systems poorly. The decision to shed assets is a stunning acknowledgment that some of TCI's most valuable cable systems will be better run by others. "It's a hell of an admission that they can't run their assets," notes a media industry investment banker. By contrast, the No.2 cable company, Time Warner Inc., seems quite comfortable managing its 12.3 million subscribers. TCI has "gone back to its roots," notes Brian Deevy, president of cable broker Daniels & Associates, when TCI decades ago commonly "let someone else run their systems for them."
TCI had to do something drastic. By late last year, its $14 billion debt load gave it an uncomfortable debt-to-cash flow ratio of about 6 to 1. And while massive cost-cutting has improved cash flow, TCI still lost 83,000 subscribers in the first quarter due to price hikes and satellite competition.
Beyond the shedding of cable assets, Malone has more deals and asset shuffling up his sleeve. TCI's programming arm, Liberty Media Inc., which holds stakes in cable channels such as Discovery Channel, Encore Media, QVC, and HSN, will likely be spun off to shareholders in coming months if the Internal Revenue Service approves the deal. TCI's satellite holdings were spun off to shareholders in December as separately traded TCI Satellite Entertainment Inc. The company got a boost when it agreed to exchange its assets on June 10 for 37% of Primestar Partners, the satellite TV outfit owned jointly by several cable companies.
BEHIND THE SCENES. Malone bundled TCI's Internet, telephony, and international assets to form a separately traded entity called TCI Ventures Group. It will be the new home of TCI's 41% stake in the @Home Network Internet service, as well as its 85% stake in Tele-Communications International Inc., which holds all of TCI's international ventures.
In addition to deals that directly affect TCI, Malone has been working behind the scenes of other companies' affairs, trying to help position them to be able to buy a choice TCI asset.
Look at the trouble he has gone to in helping Rupert Murdoch in recent weeks. Malone structured the June 11 deal to sell Pat Robertson's International Family Entertainment Inc. to Murdoch's News Corp., say sources close to the deal. Murdoch wanted IFE for its Family Channel, which he intends to use as a kids' channel to compete with the Disney Channel and Nickelodeon. TCI owned about 20% of IFE's nonvoting shares and will log a $320 million profit in the deal, says Montgomery Securities Inc.'s John Tinker.
But more significantly, Malone wanted Murdoch to win IFE because he plans to strike another deal in which Murdoch will pay $1 billion to buy out TCI's 50% stake in the Fox Sports cable network. Malone did Murdoch another favor when he persuaded Time Warner to allow Murdoch to fold the satellite assets of his failed American satellite venture into Primestar, according to an industry executive familiar with the deal.
Malone's Cablevision deal also serves other agendas. Analysts were perplexed by it because TCI's systems were valued at between $1,000 and $1,300 a subscriber, well below the $2,000-per-subscriber going rate. As a side deal to the Cablevision transaction, says a programming executive at a rival cable company, Cablevision Chairman Charles F. Dolan is expected to agree soon to Malone's request that several of Cablevison's regional sports networks affiliate with Fox Sports.
Those sports networks, in such markets as New York, Chicago, and San Francisco, would give Fox Sports a huge boost in both programming and advertising sales. That makes Fox Sports much more valuable, enabling Murdoch to justify paying the $1 billion Malone wants for TCI's half. "The deal was a brilliant move for Malone," says Mario J. Gabelli of Gabelli Funds, an investor in both companies. "It helped his debt problem, and it opened up the door for deals with Dolan."
Who stands to win by all the maneuvering? TCI's shareholders, if the stock price for a slimmed-down TCI continues its recent revival from its three-year coma. But no one benefits more than Malone does personally, since he and his family own about 18% of TCI's supervoting stock. Each time TCI spins off one of its units, Malone's TCI stake is transferred to an equal percentage of shares in the new entity.
But the deal most important to Malone personally is perhaps the most difficult to pull off: He has been trying to raise the capital to buy the 21% TCI voting stake held by the heirs of recently deceased TCI founder Bob Magness. But, sources say, even Malone couldn't immediately raise the $500 million he needed.
Ever the creative dealmaker, Malone worked out a complicated, intricately structured solution to his problem. On June 17, TCI announced it would issue 30.5 million new Class A shares to the Magness estate, which will immediately sell them to settle estate taxes. In exchange, the Magness family's 30.5 million supervoting Class B shares that Malone covets will be held, safely, for him in TCI's treasury. Malone then has two years to either buy those shares from TCI, or even just swap them for less-desirable Class A shares he already owns. A tricky solution, to be sure. But if Malone has proven anything in his years at the helm of TCI, it's that nothing is too complicated if it gets him closer to what he wants.
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