With Street’s help, TCI gains key stock

NEW YORK — Wall Street firms Merrill Lynch and Lehman Bros. are to spend $528 million buying a crucial block of stock in cable giant Tele-Communications Inc. from the estate of the late Bob Magness, former TCI chairman, in a deal that ensures the cabler keeps control of the parcel.

The deal puts to rest questions about how the Magness estate would pay close to $500 million in estate taxes due Aug. 15 and where the Magness shareholdings in TCI would end up — questions that arose after Magness died in November. While TCI chairman John Malone had a right to buy the shareholding before anyone, Malone apparently could not afford to buy the stock right now.

The stock in question is vital — it accounts for 4.7% of TCI’s outstanding stock, but it is supervoting stock so it accounts for about 20% of the voting control of TCI. Malone owns the other big block of supervoting stock, with 17% of the votes, but he needed to keep control of this block to ensure it didn’t fall into hostile hands.

Lehman and Merrill are not buying the supervoting stock, however. In the first part of the transaction, the Magness estate will swap its supervoting stock for the same number of ordinary shares issued by TCI and it will be the new ordinary stock that is sold to the two firms at $16.62 a share, in line with TCI’s stock price — although the stock closed up 6¢ to $16.81 on Tuesday.

TCI will hold onto the supervoting stock, effectively eliminating it, although Malone personally has the right to buy it or swap it within two years. Whether he needs to buy the stock isn’t clear, as the elimination of Magness’ supervoting parcel effectively increases Malone’s voting power.

TCI has an option to buy back the ordinary stock from Merrill and Lehman within two years at the sale price — which means the cabler wins big if the price goes up and loses if the price goes down. A spokeswoman for TCI said Tuesday the cabler intended to exercise the option, assuming it could do so within its financial constraints.

For their service, Merrill and Lehman get fees in the form of a premium interest rate charged on the cost of the transaction, a TCI spokeswoman said.

People close to the firms said TCI is essentially borrowing money from the two firms, which can make money on the deal because they can raise money cheaper than TCI can. The cabler is struggling under almost $15 billion in debt and couldn’t afford to risk a downgrade in its credit rating by spending the money directly on the stock.

Malone said in a statement Tuesday that the deal enabled the estate to raise money it needed “without the disruption that a sale of this magnitude might create in the public market. As for TCI … we have controlled a very valuable block of voting stock. Additionally, we have retained the ability to repurchase the shares … as we continue our commitment to work to improve our balance sheet.”

As the Magness estate has now covered its liabilities, it is not expected to sell its stake in TCI’s programming affiliate Liberty Media. Liberty had been anticipating spending several hundred million dollars on a stock buyback largely aimed at buying out the Magness holdings. Liberty stock fell 75¢ to $25.12 Tuesday.

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