Billionaire Malone Returns to Empire Building Amid Cord Cutting

John Malone is empire building again.

The billionaire made his fortune by assembling the largest cable operator in the U.S. in the 1980s and 1990s. Now, companies backed by Malone have announced, or are preparing, more than $80 billion of acquisitions -- including an offer by Liberty Media Corp. to fully own satellite radio network Sirius XM Holdings Inc., an expected bid for Time Warner Cable Inc. by Charter Communications Inc. and a likely agreement by Liberty Global Plc to purchase Dutch broadband provider Ziggo NV.

Dubbed the “cable cowboy” in Mark Robichaux’s 2002 biography, Malone is spending heavily to adapt to a new frontier, as Netflix Inc. and other competitors have consumers turning off cable-television subscriptions in favor of online streaming, said Matt Harrigan, an analyst at Wunderlich Securities Inc. The bids show Malone is betting on digital media and high-speed broadband on a global scale, he said.

“The complexity of the tech road map necessitates consolidation,” Harrigan said.

In order to increase the size of his companies and to develop technology faster, Malone needs to take full control over his companies, Harrigan said. A spokesman for Malone didn’t immediately reply to requests for comment.

Deal Hurdles

If all the deals are successful, the three companies will have spent more this year on acquisitions than they did in the decade through 2013, data compiled by Bloomberg show. That success is far from certain: Sirius rose above the value of Liberty Media’s offer yesterday, signaling that investors expect a higher price, and Charter may face competition from Comcast Corp. and Cox Communications Inc. for Time Warner Cable.

The largest previous deal by any of the three companies was the purchase of Virgin Media Inc. by Liberty Global last year for about $23 billion including debt.

Liberty Media made an all-stock $10.6 billion offer last week for the 47 percent of Sirius XM it doesn’t already own. Liberty Media is also the largest shareholder in Charter, which may unveil a $62 billion bid for Time Warner Cable this week, people with knowledge of the matter have said.

The Sirius deal may help Liberty Media fund Charter’s offer for Time Warner Cable, because it will give the company more cash flow and additional assets to borrow against, Chief Executive Officer Greg Maffei said in an interview last week. Liberty owns 27 percent of Charter.

Beating Netflix

Using Sirius’s cash and lending capacity to combine Time Warner Cable and Charter would help the cable industry compete with Netflix, satellite-TV providers, and telecommunications giants AT&T Inc. and Verizon Communications Inc., which provide TV and Internet services.

“Changes in the cable industry that may reward scale combined with the availability of inexpensive debt make cable an attractive place to do deals,” Chris Marangi, a portfolio manager at Gamco Investors Inc., said in an interview.

Liberty Global, Malone’s European telecommunications holding company, is nearing an agreement to purchase Dutch broadband provider Ziggo, which has a 6.75 billion euro ($9.2 billion) market value, people with knowledge of the matter said. The companies aim to announce a friendly deal as early as the middle of this month, and are hammering out a final acquisition price and other terms, the people said.

In Holland, having one national cable brand with Ziggo can help foster innovation by creating a single standard for a new cable interface, Wunderlich’s Harrigan said.

Malone’s Mistake?

Still, Malone may be making a mistake targeting cable assets, according to Leo Hindery, who worked with him as president and chief executive officer of Tele-Communications Inc.

The industry’s days of charging $150 for Internet, TV and phone are numbered, Hindery said. As set-top boxes are eliminated and content and voice are accessed solely over the Internet, selling three products for $50 each will be replaced by one product that sells for much less, he said.

“Owning a lot of cable systems does not mean much to me,” Hindery said in an interview on Bloomberg Television. “The triple play is a fantasy. It is one wire.”

Malone sold TCI to AT&T Inc. in 1999, a move that he has recently said he regretted. Hindery said the billionaire is “absolutely wrong” to see the sale of TCI as a mistake. The cable industry is facing competition from DirecTV, Dish Network Corp., AT&T U-verse and Verizon’s FiOS, and will be unable to increase the price of broadband when wireless companies are also selling the same product, he said.

Consolidation Motives

Malone’s bets signal he disagrees. He has spent about $40 billion on European cable assets since abandoning the U.S. market with the TCI sale.

While U.S. cable companies have lost TV subscribers for years, they continue to add Internet customers. Consolidation can help the industry prevent further video customer erosion by unifying around a common user interface and a full array of programming available online, on all devices, Malone said in October.

“The cable industry has been very slow and very uneven,” creating opportunities for Internet-based rivals, Malone said in October. The idea that the industry can get together and solve its technology challenges “certainly increases my appetite as an investor to be willing to invest in the business through consolidation.”

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