John Malone: Tv's New Uncrowned King?

With Liberty Media, he'll run a programming juggernaut

Years back, when John C. Malone was building Tele-Communications Inc. into a cable giant--with mountains of debt and rising losses--he was known to face down creditors with a flamboyant ploy: Throwing his car keys down on his desk, the TCI chairman would tell visitors, "Here are the keys. You run this company."

Finally, Malone has given his backers a big payoff, selling TCI to AT&T for $48 billion. But this time, Malone--who will be AT&T's biggest individual shareholder, with 1.5%--is keeping the keys to his new dealmaking machine for himself. Even while the lawyers haggle over the final wording of the AT&T deal, Malone has been focusing his attention on Liberty Media Corp., the separate entity that he created to house TCI's programming and noncable holdings. Although its assets will be owned by AT&T but traded separately as a "tracking stock," Malone will be Liberty's chairman, with the right to name most of the members of its board, and Liberty will gain $5.5 billion in cash on closing the AT&T deal.

BUZZ, BUZZ. Tongues in the media world are wagging about how Malone cut his sweetest deal yet, laden with concessions from the telephone giant. And the talk is almost as loud over what he'll do next at the helm of a programming juggernaut holding everything from big stakes in Discovery Communications, Time Warner, and USA Networks to expanding partnerships with Rupert Murdoch's News Corp. "Kinda scary, isn't it?" says John Feltheimer, president of Sony Corp.'s television unit, which last year was part of a $539 million deal with Liberty to buy control of Telemundo Group Inc., the Hispanic television network.

Impressive, certainly. To get to the 14 million cable subscribers TCI and its affiliates control as a platform for local phone service, AT&T agreed to leave Liberty with what Salvatore Muoio, managing partner at SM Investors LP in New York, estimates to be enough cash, liquid assets, and borrowing capacity to pursue a $20 billion acquisition. Says Muoio: "It'll be one of the bigger pots of cash out there among media companies."

FRONT BURNER. And make no mistake, Malone is plotting ways to spend it, even while he and fellow Liberty execs beg off interviews, citing the regulatory "quiet period." Wall Street investment bankers say a move for a stake in General Electric Co.'s NBC, contemplated earlier this year, could soon be back on the front burner. Malone and his lieutenants are also openly enthralled with the coming generation of digital set-top boxes. They are pursuing deals for new services to be delivered over them, and they may also carve out a new niche leasing the boxes to cable and satellite operators. If Malone gets his way, he'll have an even more powerful hold over what people watch on TV than he did as a cable tycoon.

Meanwhile, Liberty is near closing a $2 billion deal, through subsidiary United Video Satellite Group Inc., to acquire the TV Guide assets from News Corp. And United Video may yet again try to buy Gemstar International Group Ltd., for which it launched a $2.8 billion bid in June. The offer was pulled when the Pasadena (Calif.) on-screen programming guide company adopted a poison-pill defense.

As with Gemstar and TV Guide, the deals that Malone wants to do at Liberty are focused on giving it either the technology or the brand name to play in the coming digital-TV age. In mid-September, Liberty paid $5 million for a 10% stake in ACTV Inc., which owns technology that allows viewers to call up statistics about players involved in games they're watching or interact with other types of shows.

Meanwhile, Malone and Murdoch are expected to finalize in early October their $700 million offer, through United Video, to buy a controlling stake in the Primestar Inc. direct-broadcast satellite service. In the future, says Lehman Brothers media analyst Larry C. Petrella, Malone is likely to find his favorite kind of deal--cheap--overseas, in troubled entities such as Germany's Kirch Group.

For all its financial muscle and its perch at the epicenter of a glamour industry, Liberty looks like little more than a mutual fund for programming assets: Only 14 executives rattle around its Englewood (Colo.) offices. Indeed, the bulk of the assets in Liberty's portfolio are operated day to day by such heavyweights as Ted Turner and Gerald M. Levin at Time Warner, John Hendricks at Discovery, and Barry Diller at USA. Says Ted Henderson, managing director of brokerage Janco Partners Inc. in Englewood: "The Liberty portfolio has assembled a group of executives that, if you believe in the future of content ownership, you want to invest alongside."

Malone may leave the programming to others, but he has made sure there's a home for all of his favorites. A key concession that he extracted from AT&T will give Liberty channels "preferred vendor status" on the existing TCI cable systems. That, claims John Tinker, an analyst at NationsBanc Montgomery Securities Inc., means "TCI's systems give him all but free channel space for as many as 12 channels in a third of the country."

BIG GAME. That makes bringing additional channels into the Liberty portfolio especially appetizing. The 49% stake in Discovery, for instance, is expanding through such new channels as the fast-growing Animal Planet and the recent purchases of the Travel Channel and part of CBS's struggling Eye on People. CBS is also looking for a partner for its Spanish-language news network, TeleNoticias, which could fit nicely with Liberty's recent investment in Telemundo. Another long-rumored deal is a merger of Liberty's Encore pay-TV service with Viacom Inc.'s Showtime pay service--and Muoio speculates that someday Liberty could make a run at Viacom itself.

Other big game could include taking part or all of CBS or NBC, most likely through USA Networks, in which Liberty holds a 21% stake. At the moment, though, there's no deal being discussed with NBC, says USA Chairman and CEO Barry Diller. Resumption will occur, Diller adds, "only if someone is going to offer us a great deal that we haven't seen so far."

True to form, the greatest deal Malone has cut is for himself. Already, AT&T has agreed to pay a 10% premium for the TCI supervoting shares, of which Malone owns the lion's share--on top of the 30% premium it is paying for TCI common shares. Malone's take: around $1.8 billion, including Liberty shares worth about $852 million. The biggest risk, however, is whether Malone's maverick style will clash with the buttoned-down AT&T culture. Wall Street sources cite AT&T Chairman C. Michael Armstrong's discomfort with Malone launching a hostile bid amid their merger dealings as one reason the Gemstar offer was pulled. And although both companies are quick to point out that AT&T did not acquire Liberty as part of the TCI transaction, a "capital stock committee" made up of two outside AT&T directors and Malone will oversee the AT&T/Liberty relationship.

As part of the merger deal, AT&T will give Liberty $5.5 billion in cash for some of its existing assets, such as its stake in the cable online service At Home Corp. Liberty also gets TCI's $1.7 billion in tax-loss carryforwards, and if it generates tax losses for AT&T, Liberty gets compensated from the phone company. Moreover, after years of near-junk-bond debt ratings, Malone may try to use Liberty's links with AT&T to borrow money at better rates. An AT&T spokesperson stresses, however, that AT&T will not be helping Liberty borrow money.

Either way, it's little wonder that Malone has been gathering his top dealmakers, such as Liberty President Robert "Dob" Bennett, around him for his second act. Recently asked about how he finagled such a sweet deal, Malone feigned surprise and said there's nothing in the new Liberty that he didn't already have at TCI. "Who's it a bad deal for?" asks Malone. "AT&T got what they wanted." And, one way or another, so will Malone. After all, if for some reason AT&T decides to call off the marriage, it is still required to pay TCI a hefty $1.75 billion breakup fee.

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