While he’s best known as a media mogul, John Malone holds a lesser-known distinction: He’s the largest individual landowner in the United States. The 75-year-old Liberty Media chairman has 2.2 million acres at his disposal, from majestic tracts of forest in Maine and New Hampshire to his Silver Spur Ranches, where cattle roam across Wyoming, New Mexico, Colorado and Nebraska.
Malone’s land holdings are much like his media-business interests these days: vast, disparate, and not contained merely to the U.S. — he even owns a castle in Ireland. And just as he amassed eye-popping acreage in the past decade with the goal of preservation and sustainability, the man known as the Cable Cowboy is on a mission to drive consolidation in the cable and content arenas, for the same stated reasons.
|Chris Buzelli for Variety|
The pending $67 billion acquisition by the Malone-affiliated Charter Communications of fellow cable operators Time Warner Cable and Bright House Networks marks the return to action of the man also once dubbed Darth Vader for the power he exerted over the media business in the 1980s and ’90s.
Malone, whose net worth is estimated by Forbes at $7.7 billion, also came back on Hollywood’s radar in a big way last year by assembling a 10% stake in Lionsgate through characteristically complex transactions involving three of his affiliated companies: Starz, Discovery Communications and Liberty Global. In Malone’s view, content companies need scale and global reach to survive in a world of infinite choice and extreme audience fragmentation.
But as the exec and his top lieutenants fire up efforts to grow the Liberty empire once again, big questions loom about whether consolidation is the answer in the current tech-dominated era, and whether the Liberty model of leveraging up its investments will be as effective if interest rates continue to rise.
“Investors are puzzled about how all of these different pieces are going to come together,” says Amy Yong, an analyst who follows Liberty for Macquarie Securities. “The market expects him to do something. There are a lot of pieces (in play) in all of those different media companies.”
Some of the roadblocks are likely to be self-imposed by Malone’s long-standing M.O. as a highly disciplined investor. His focus on structuring deals to limit tax bills at all costs is legendary, and the source of much intricate orchestration in most of his transactions.
Those who have worked with Malone, who is an engineer by training and also has a Ph.D in operations research, say one of his greatest assets is his ability to be “agnostic” and “ego-less” about dealmaking.
“Unlike many people who are very active in markets, John does not feel obligated to do a deal for the sake of doing deals,” says National Public Radio CEO Jarl Mohn, who ran the Liberty Digital subsidiary from 1999-2002. “He’s looking for opportunities, not deals.”
Malone declined to comment for this story.
Within the past two years, industry sources say there’s been a consensus among Malone and his lieutenants — notably Liberty Media CEO Greg Maffei and Liberty Global CEO Mike Fries — that now is the time to get busy in M&A through a combination of Malone’s personal holdings and Liberty Media’s various entities (see chart). It’s a plan not altogether different from the one put in place at Liberty Global, where much of Malone’s energies have been focused the past 15 years in building the largest cable operator outside the U.S.
|“Unlike many people who
are very active in markets, John does not feel obligated to do a deal for the sake of doing deals. He’s looking for opportunities, not deals.”
|Jarl Mohn, National Public Radio CEO|
That’s why “scale” has long been a mantra for the Oracle of Englewood. Malone has talked about the urgent need for media companies to have extensive reach beyond domestic shores in order to make the most of their investments in content, production and distribution.
The scenario that Team Malone hopes to avoid is watching their holdings become undersized targets, while others — perhaps the tech giants or 21st Century Fox or the new breed of Chinese investors — go big-game hunting for Time Warner, ITV (in which Liberty Global owns a 9.9% stake), CBS Corp., Viacom, Sony Pictures Entertainment, et al.
Liberty and its affiliates also want in on the global content boom. Malone has set his sights on Lionsgate as the vehicle through which to build his acquisitions, at a time when consolidation is in the air for content-focused companies. After acquiring a 10% stake in Lionsgate in two transactions last year, the exec has already played matchmaker in sparking the acquisition talks under way between Lionsgate and Starz, the premium cabler that Malone controls.
Liberty Global and Discovery jointly acquired full ownership of U.K.-based production conglomerate All3Media in a $930 million deal. But Lionsgate is a much bigger content engine.
“He’s pretty much opening up the content consolidation side,” says analyst Matthew Harrigan of Wunderlich Securities, who has covered Malone and Liberty for more than 15 years. “If you come to the conclusion that programming economics just don’t make sense unless you can do everything off one platform and own all rights, then you do the deal with Lionsgate.”
Malone has praised Lionsgate leaders Jon Feltheimer and Michael Burns for building a formidable company that competes with the majors. “These guys are about as good as it gets in scripted,” Malone told CNBC in November.
Another reason Lionsgate is attractive to Liberty is that as a studio based in Toronto, its lower Canadian corporate tax rate could offer benefits if Lionsgate were to acquire Starz or Discovery — or both.
One of the big questions right now is whether a Malone-backed Lionsgate will become a vehicle for pursuing a much bigger fish, such as Time Warner.
Malone and Co. have historically preferred to pounce on bargain opportunities, like the investments in Charter and SiriusXM, that pay off by refurbishing promising assets with investments fueled by debt and smart management.
Paramount Pictures is on the block, offering a minority stake, but Maffei threw cold water on speculation that Liberty might be interested. He also made it clear that Liberty per se is not likely to be the vehicle to pursue content deals. “I don’t see the obvious path for that, other than through Starz,” he said March 7 at an investor conference.
|John Malone, right, sold his TCI cable empire to AT&T (repped by then-CEO Michael Armstrong) in 1998. He’s poised to flex new muscle in the industry with the pending Charter-Time Warner Cable merger. AP Photo/Kathy Willens|
Without taking a big swing at a company with marquee global brands, it will be a longer and steeper climb to the Shangri-La of scale that Malone envisions. MGM, AMC Networks, A+E Networks and Scripps Networks Interactive are among the smaller players that some have speculated as targets of Malone-affiliated firms and others. But even a combination of one or more of those companies would not vault Lionsgate or Charter into the TV programmer big leagues, and all of them would surely demand a premium for acquisition. Even in the talks between Starz and Lionsgate, which are now distant cousins thanks to Malone, the question of valuation is the highest hurdle.
Starz operates 17 Starz and Encore premium TV channels, and all of them are factored into the company’s balance sheet. But in a world where skinny bundles and over-the-top distribution of a la carte channels are gaining steam, there’s genuine skepticism that the channel tonnage model that once defined success for cable programmers will endure, meaning the channels that contribute to overall valuation today could be worthless in the coming years.
It’s understood that Discovery kicked the tires on Scripps, parent of Food Network, HGTV and Travel Channel, in 2014, but opted against pursuing a deal because of the $10 billion price tag. Scripps’ limited international exposure was a deal-breaker for Discovery, which is banking on growth outside the U.S. to power earnings.
There’s also evidence that investors have become more skeptical about the benefits of continued consolidation among the largest media companies. That could impact the perception of Malone’s efforts.
Wall Street did not cheer when 21st Century Fox made its brief run at Time Warner in 2014; in fact, the swift drop in Fox’s share price was one factor that forced Rupert Murdoch to withdraw his $80 billion bid. Investor nervousness about the earnings-eroding impact of cord-cutting has increased exponentially since then.
Moreover, cheap debt has been the fuel for Liberty Global’s acquisition spree and the growth of Sirius XM Satellite Radio. But the Federal Reserve has signaled that the low interest rates instituted amid the economic crisis of 2008-09 are coming to an end, which means it will be more costly to finance megabucks acquisitions in the coming years. Higher costs means more pressure on companies to deliver accretive gains quickly from mergers, a tough mandate in an environment where even the largest companies are grappling with fundamental uncertainties about the future of advertising, affiliate fees and audience behavior.
Within the Liberty orbit, sources say, there is concern about whether the Malone playbook of acquisitions, spinoffs and complicated equity investments may have run its course if the core U.S. cable TV sector is inevitably heading into a period of decline.
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As the regulatory review of the Charter deals heads into what is expected to be the home stretch this month, Malone and company are waiting to see if the feds approve the combination or send him back to the drawing board. The mergers would turn Charter into the nation’s second-largest cable operator behind Comcast, whose bid to acquire TW Cable was nixed by regulators last year.
Amassing more distribution alone makes sense, because it gives Charter greater clout to control the fees it pays programmers. “The consolidation of the MVPD industry will, for the first time in decades, tilt the affiliate fee negotiating hand toward distributors in 2016 and beyond,” media analyst Michael Nathanson of MoffettNathanson wrote in January.
Some also doubt whether cable systems are the smart bet they were in the 1980s and ’90s when Malone wielded a big club at the nation’s largest cable operator, Tele-Communications Inc., which he sold to AT&T for $48 billion nearly 18 years ago.
The cable business is increasingly becoming defined by broadband service, which has become a political football, spurring regulatory action and furious lobbying efforts that pit Big Cable against Big Tech. As part of the Charter-Time Warner Cable courtship, Charter has pledged to abide by net neutrality provisions that would hinder its ability to charge heavy bandwidth users, such as Netflix, for priority access to its pipes.
“Charter for him is TCI redux,” says a former Malone associate. “It’s a cable company where he thinks he can have inordinate influence. But it’s a misunderstanding of where the industry is.”
By many accounts, Malone is troubled by what he sees as the U.S. cable industry’s lack of innovation and R&D. The muted response to changing viewing habits allowed Netflix to sneak under the tent and eat cable’s lunch.
The reach of companies like Google, Amazon, Apple and Facebook is dwarfing that of cable operators. In varying degrees, those four horsemen of the digital apocalypse are starting to harness their platforms to become content distributors, and Malone clearly has noticed.
“If you compare the size and scale of the players … you’ve got these huge companies on the technology side and massive balance sheets,” Malone told CNBC in November. “Clearly there is still room in the media sector to create some bigger and more global entities.”
In response, sources familiar with Liberty’s thinking say Malone aims to position a bulked-up Charter to staunch the bleeding of cord-cutting by creating a massive streaming-video platform that serves up everything cable has to offer on the linear side but in a seamless presentation customized to individual taste, in keeping with the ethos of the on-demand era. In this concept, Netflix and its ilk are one of many apps hosted on a content hub powered by cable broadband and enhanced by authenticated cable programming offered through a variety of consumer-friendly channel bundles, from fat to skinny.
Discovery CEO David Zaslav has spoken of how just such a strategy would have helped the cable industry better withstand Netflix’s challenge. “If we had that platform … there wouldn’t have been a need for Netflix or an SVOD platform, because everything you want would have been available to you through your (set-top) box,” Zaslav said during a Q&A with Malone at Vanity Fair’s New Establishment conference in October. “It was the lack of innovation in the box that gave rise to more pliability of content. In a capitalist environment like ours, we wake up and now there’s a disruptor that has become very powerful and very compelling.”
Had Malone been active in cable during the past decade, “there would have been a coordinated industry,” Zaslav added.
Zaslav’s remarks at such a high-profile forum seem unlikely to have been an impromptu tribute. There’s a “draft Malone” campaign under way to set the table for his return to a prominent perch as a galvanizer of the industry.
Malone has spoken with palpable pride about the accomplishments of the first generation of cable guys who frequently set aside their natural competitiveness to cooperate on solving industry-wide problems and advancing the greater good.
For years, the wired world was dominated by entrepreneurs who were driven to build an alternative to the broadcast TV establishment. It functioned in many ways like a club, and Malone was its undisputed leader. His bona fides as a pioneer were established through his long run at TCI, which began in 1973, and before that as president of General Instrument’s Jerrold Electronics, a supplier of equipment to the nascent industry in the late 1960s.
That history helps explain Malone’s motivation to return to the action at a time when the road ahead for dealmaking and long-term operating success appears to be anything but smooth.
“I love the cable industry. I grew up in it,” the exec told CNBC. “I want to see these businesses succeed.”
Malone certainly doesn’t need a third act. His legacy as one of the most influential and successful figures in television history is secure. He’s known to enjoy outdoor pursuits including skiing, snowmobiling, boating, fishing and shooting clay pigeons. Despite his reputation as a formidable businessman, there’s a lighter side to the mogul, who possesses a “dry Irish wit,” as one colleague observed.
“He loves a good joke,” adds NPR’s Mohn. “If you’re loose around him, he’ll really respond. I found him to have an amazing sense of humor.”
Judging from his demeanor at recent public events, Malone seems to enjoy being back in the hunt at a volatile time. The Cable Cowboy, with nothing to lose and a love of the game, is sharpening his spurs one more time.