Commentary: What Does John Malone Really Want?

These days, you need a road map to follow the twists and turns of a John C. Malone deal. The former chairman of cable giant Tele-Communications Inc. is a master of shuffling assets to create value--and sometimes more than a little confusion. True to form, Malone has set the collective minds on Wall Street wondering what's really going on with his latest complex deal. In it, Malone's Liberty Media Group swaps its 21% stake in Gemstar-TV Guide to increase its stake in News Corp. to 18% from 8%. Malone is also putting in $500 million in Murdoch's satellite company, Sky Global Networks Inc., for a 6% stake.

The deal seems straightforward enough. Malone, smitten with the power of wireless technology, wants to team up with Rupert Murdoch in an expected bid for General Motors Corp.'s DirecTV satellite service. With Gemstar and some South American satellite assets thrown into the deal, Murdoch could spin off his far-flung satellite holdings into a separate public company worth an estimated $40 billion. Those holdings, in turn, could be used to pay GM for DirecTV.

DEALS. But that could be just the start of the next chapter in Malone's peripatetic dealmaking. Malone also wants to own a piece of every possible way to ship movies, TV shows, and data into your home, says Mario J. Gabelli, the New York-based mutual fund manager whose various funds hold about 10 million Liberty Media shares. That's because Liberty owns a ton of so-called content--everything from stakes in the Discovery Channel to Inc. And he wants to put distribution of those assets into hands of folks he knows and trusts, says Gabelli. With 18% of News Corp., Malone will now sit on the board of the world's largest satellite company. Add that to the 38% stake Liberty has in United-GlobalCom--the largest cable operator in Europe and Asia--where Malone also is on the board.

Sound like enough? There may be more. Malone would still have to extricate his Liberty Media from AT&T, its parent since Malone sold TCI to the phone giant last year. Under that agreement, AT&T owns Liberty's assets, but Malone reserved the right for himself and his team to make all management decisions. It's no secret that relations between Malone and AT&T Chairman C. Michael Armstrong have been strained, with Malone's personal 1% stake in AT&T having lost more than $1 billion in value since the deal closed. That's why the buzz mill on Wall Street has been working overtime to figure out how Malone intends to make his exit.

Now, the Murdoch deal may give Malone his big chance to bail, at least according to this reading of the tea leaves. How's that? Well, a likely joint Malone-Murdoch bid for DirecTV's satellite service would ironically put AT&T in the untenable position of owning the nation's largest cable system as well as the satellite service that is its largest single rival. Armstrong must already resolve antitrust issues to complete AT&T's $44 billion purchase of cable operator MediaOne Group. One of the options given to him by the Federal Communications Commission would be to spin off Liberty Media. A satellite controversy created if Liberty co-owned DirecTV could force Armstrong's hand, and hasten the move.

That raises the question of where Malone would go next. Says Gabelli: "As a free agent, John Malone would be something to watch." A number of Wall Street analysts figure that Malone wants to increase Liberty's stake in Time Warner Inc., currently at 7% but due to drop with Time Warner's pending merger with America Online Inc. As part of Malone's parting from AT&T, PaineWebber Inc. analyst Christopher P. Dixon figures Malone could pressure Armstrong, who is under regulatory pressure to sell, to unload the 25% stake in HBO that AT&T got in that MediaOne deal. Then Malone could swap the stake for a larger piece of the new AOL-Time Warner. That would suit AOL-Time Warner, which has long wanted to get that HBO stake back.

Pretty convoluted, all right. Which is why it just might be exactly what's inside John Malone's head.

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