FOR MORE THAN A DECADE now, Wall Street has elevated corporate CEOs to the level of demigods, the best seen as part rock star, part Midas. I tend not to share in this idolatry, holding more to the “they put their pants on one leg at a time” view.
And yet, in some rare cases, a company is such a total creation of one individual that something approaching genuflection is perhaps called for. John Malone, chairman of Liberty Media Group, may be such a person.
Not an operations type, the ledger is his domain, and his legerdemain is, well, legendary. Selling his former Tele-Communications Inc.’s cable systems to AT&T back in l998, which created today’s Liberty as a sort of subsidiary of AT&T, he negotiated a deal with terms reminiscent of those Douglas MacArthur offered the Japanese in l945.
AT&T got all the bricks-and-mortar cable systems, handing TCI’s shareholders about $48 billion in the communications giant’s stock — and in the process making Malone AT&T’s single largest shareholder. Liberty got to keep all the more desirable programming assets, plus about $5 billion of Ma Bell’s cash, as Malone negotiated seven years of near-total independence from his putative parent.
Malone has used that independence to make Liberty into an amazing, if bewildering, collection of cable networks, foreign cable systems, satellite holdings, Internet assets, post-production companies and assorted multibillion-dollar minority positions in such media companies as News Corp., USA Networks, Gemstar-TV Guide and Time Warner.
Over the past several months, and accelerating last week, Liberty Media’s stock has been in an unprecedented decline, closing Sept. 22 at $18.25, down from $24 in July and more than $30 in March.
WHAT HAS CAUSED this hiccup in Malone’s heretofore uninterrupted production of capital gains almost beyond the dreams of human avarice? (If you think I exaggerate, please note that a $25,000 investment in TCI when Malone joined the cabler in 1973 had become worth $7,250,000 in AT&T and Liberty stock by the end of l999.)
The simple answer: There has been a pronounced weakness in many of Liberty’s underlying holdings, Sprint PCS chief among them. Liberty’s chunk of this company has dropped a cool $4.5 billion (from a value of $11 billion), in just a week. Another, ICG Communications, appears about to become a $500 million writeoff for Liberty. Wall Street’s panicky reaction demonstrates its usual preference for trees over forests.
While simple answers may explain short-term price swings, they don’t necessarily reflect underlying realities, especially when the subject is Malone and his labyrinthine financial dealings.
Liberty Media is not susceptible to normal analysis, certainly not the simpleminded approach of calculating the fluctuating values of its holdings based on closing market prices.
First, it is a “tracking stock” and, as such, does not confer actual ownership in the underlying assets — not a great concern to me, but a consideration in valuing the company.
Second, its financial statements are best approached like reading Proust or Joyce — just let them wash over you and don’t even try to grasp all the details.
AS WITH PROUST or Joyce, the effort is richly rewarded. Liberty Media represents interests in most of the exciting areas where entertainment and technology intersect, acquired by Malone at very attractive prices, on terms available to him and him alone.
In this he most resembles Warren Buffett, who is such a desired shareholder that he can demand — and receive — far better terms than ordinary investors. But he departs from Buffett in having a narrow and intense focus on one industry: the making and distributing of content.
Liberty Media may appear to be a mutual fund of programming assets (with a grand total of 33 employees, it is perhaps the ultimate in lean and mean). But that is far too limited a view of this unique creation, a powerful assemblage of interlocking holdings.
Malone and his team are constantly refining the mix, tweaking the deals, and extracting every ounce of benefit for his shareholders. Liberty’s shares have a current market value of about $46 billion, and I quickly totaled up publicly quoted assets worth more than $40 billion, even at present, somewhat depressed prices.
And this figure assigns no value to his 100% ownership of Starz Encore with nearly 15 million pay subs, 49% of Discovery and the Learning Channel, 50% of Court TV, 35% of Black Entertainment TV, 35% of Japan’s largest cable company and 92%-owned Liberty Digital, which holds assorted pieces of many of the Internet’s former high flyers, now fallen angels. There isn’t much in the way of debt, and what’s there is more than offset by cash.
NEARLY EVERY MEDIA company in the world that isn’t already Malone’s partner wants to be. Meanwhile, individual stock buyers, thanks to Wall Street’s myopia, can be become his partner at a discount from any reasonable guess at the company’s true asset value.
While the stock could easily go lower as Wall Street continues to underappreciate many of these irreplaceable assets, betting on Malone has been a certain winner in the past. I for one would be inclined to let this bet ride for quite a while.