You don’t want to be on the wrong side of the table from Liberty Media Corp. Chairman John Malone.
That was the maxim for almost two decades, as Malone built Tele-Communications Inc. into the nation’s largest cable-television company before selling it to AT & T; Corp. in 1999, while retaining control of the Liberty Media programming arm.
Now, as Malone prepares for the split-off of Liberty Media from AT & T;, he has delivered two stinging reminders of his power and pique.
On July 10, Malone resigned from the AT & T; board and sued AT & T; over a pay-TV dispute, even though Liberty Media remains an AT & T; subsidiary until this month’s split-off.
Six weeks earlier, Malone trumped bondholders who had dared to block a merger of Liberty Media and UnitedGlobalCom Inc., the largest cable-TV operator outside the United States. Instead of proceeding with an equity infusion in UnitedGlobal, as announced, Liberty Media became a lender to the company on May 29 with an $855 million exchangeable note that is senior to bondholders.
Got the message? Don’t mess with Malone.
The AT & T; dispute centers on that company’s failure to pay $44 million in license fees that Liberty Media’s Starz Encore Group claims is due under a 25-year deal signed with Tele-Communications in 1997. Starz Encore contends that AT & T; inherited the deal when it bought TCI; AT & T; questions the validity of the contract.
According to a 1997 filing by Tele-Communications, the company’s fixed annual payment to Starz Encore Group would increase annually from $220 million in 1998 to $315 million in 2003, with additional increases to cover inflation through 2022.
Broadcasting & Cable Magazine reported the license fee has turned out to be twice as much as other cable operators pay, calling it a strong “example of how Malone used his control of TCI’s systems to benefit Liberty’s network holdings.”
The magazine, citing unidentified cable industry sources, reported Malone was “furious” with AT & T; Chairman C. Michael Armstrong and AT & T; Broadband Chairman Dan Somers after receiving a three-sentence letter to Liberty that challenged the Starz contract in the spring. But he didn’t want to sue until he left the AT & T; board.
Malone quit a month early, following the revelation that he would be excluded from talks on Comcast Corp.’s bid for AT & T;’s cable-TV unit. That same day, Starz filed its lawsuit against AT & T; Broadband in Arapahoe County District Court in Colorado.
Two days later, Malone made public his intent to sell 5 million AT & T; shares, or about 20 percent of the shares he held as of Jan. 1.
Look overseas
Although there was a flurry of speculation that Malone might try to buy back his old cable systems, Liberty Media soon quashed that talk. Malone wants to replicate his TCI success on foreign soil, as he told investors on a conference call in February. To that end, Liberty Media is investing more than $5 billion in European cable-TV.
On June 21, Liberty Media announced that it would acquire six cable-TV companies in Germany from Deutsche Telekom for terms that haven’t yet been disclosed.
Liberty Media has agreed to invest an additional $543 million in cash in UnitedGlobalCom in the third quarter, following a shareholder vote on certain transactions. The transactions will give Liberty an economic interest in UnitedGlobalCom ranging from 44 percent to 51 percent, but Liberty will continue to abide by a 10-year agreement that places voting control in the hands of company founder Gene Schneider.
Schneider, 74, and Malone, 60, have worked closely in the past. Schneider sold his United Cable Television Corp. to Malone in 1989, but bought back its cable systems in Norway, Sweden and Israel for $20 million. Schneider’s United International Holdings Inc., based in Denver, went public in 1993 and expanded its cable business to 26 countries in Europe, Asia/Pacific and Latin America. In June 1999, Schneider changed the company’s name to UnitedGlobalCom.
The European operations are held through the 52.6 percent-owned United Pan-Europe Communications NV, which sold shares to the public in 1999. In the U.S., the company’s American depositary receipts soared as high as $79 in March 2000 before crashing to the current $1 level.
UPC, as the European company is called, is a victim of a widespread panic about telecommunications stocks, but it has also suffered from a loss of confidence in its management team, led by Schneider’s 45-year-old son, Mark, a former communications lawyer whom the Seattle Times described as “arrogant, cocksure and ready to rumble.”
Funding gap
In its rush to grow, UPC has missed some of its projections for the rollout of new products and revenue growth. Last year, the company reported a loss of $368.5 million in profit before interest, taxes, depreciation and amortization.
Despite the $855 million loan from Liberty Media in May, analysts still see a funding gap developing in the latter part of 2003, before UPC is expected to reach break-even cash flow in 2004.
Amid these concerns, bondholders in February refused an offer of cash to waive their right to be repaid in full if control of UnitedGlobalCom changed hands. In May, Malone struck his agreement to lend a total of $1.4 billion to UnitedGlobalCom and its subsidiaries, with an exchangeable note that puts him ahead of bondholders if the company goes bankrupt.
Most investors, of course, are hoping it won’t come to that. But as one investor in the European cable stocks said to me, “The bondholders did a completely stupid thing. You don’t do that to John.”
We’ll remember that.
Kathryn Harris is a columnist for Bloomberg News.
