Now, less than 10 months after recombining TCI with the Liberty Media programming company, Malone is asking holders to split up the businesses again. Liberty’s holdings include the Discovery Channel, regional sports programming, Encore and big pieces of Home Shopping Network, Turner Broadcasting and the Black Entertainment network. Rather than separate TCI into two companies, Malone wants to convert TCI’s common stock into two separate “targeted” stocks. One stock, called TCI, would represent its cable operations, a business in disfavor on Wall Street these days. The second, called Liberty, would represent pure programming, which is hot. The idea: the cable and programming stocks will fetch a higher total price than TCI, which trades at its 1989 price level. Malone wants a higher stock price to help TCI raise money to compete against deep-pocketed regional phone companies, which are trying to muscle into the cable business even as cable companies are trying to provide local phone service. Malone’s plan to avoid this problem by selling out to Bell Atlantic collapsed in 1994. Hence TCI’s need for big bucks.
Wall Street has been combing the fat document describing the split-up, trying to find how Malone has loaded this deal in his favor. That search is perfectly understandable. After TCI and Liberty split in 1991, Malone sliced and diced Liberty in so many different ways that he put up almost no money but ended up with TCI shares worth more than haft a billion dollars, even at today’s depressed price.
So far, no one has been able to find Malone’s trick this time. But that’s probably because we’re looking for the wrong thing. Instead of looking at this deal, which seems perfectly straightforward, we should look at the last deal, to see why Liberty and TCI were recombined in the first place. Think about it. The companies merged in August,and by November TCI announced plans for a split-up. Why was it a good idea to recombine the companies in August and then to create separate stocks in November?
“A lot of things changed,” said Peter Barton, president of Liberty, who points out that even though the TCI-Liberty recombination was completed last August, it had been in the works for many months. And to be fair to Malone, much of what he’s doing here is giving Wall Street what it wants. This is a classic example of the old fine “When the ducks quack, feed them.” Running a combined cable-programming company today is like waking up with a closet full of out-of-style ties. Wall Street loved cable-programming combos in 1993, but now it lusts for pure plays. Next week, who knows?
The 1998 plan to recombine TCI and Liberty obviously was part of the deal Malone made to sell beth com-parties to Bell Atlantic for around $80 billion. But after that deal cratered in February 1994, Malone went ahead and recombined the companies anyway. Why? TCI won’t say. I think Malone recombined the companies to get his Liberty Chips Off the table. If you read TCI filings closely, you see that Liberty might have negative cash flow as a stand-alone company. There’s nothing wrong with Liberty’s businesses. The problem is that holdings like its stake in Turner Broadcasting and Home Shopping Network produce little in the way of cash for Liberty, despite being very valuable. TCI, by contrast, gets an enormous cash flow from the currently unfashionable cable business. Barton claims cash flow isn’t a very big problem, because Liberty can borrow all the money it needs to expand and its overhead is very low. Well, maybe.
It sure looks like John Malone is trying to get the best of both worlds. He made a fortune by making Liberty a separate company, then recombining it with TCI to produce one financially sound whole. Now having become a major TCI shareholder with his Liberty machinations, he’s trying to goose TCI’s share price by carving up the company’s stock without carving up the company. If that works, TCI will be better able to fight the phone companies. And it will give Malone, who scarcely needs it, a second portion of cake.
