Liberty now cash-rich

Company enjoys tax-free $5.5 bil windfall in wake of TCI-AT&T deal

NEW YORK — John Malone’s Liberty Media Group, until now the programming arm of Tele-Communications Inc., will become an extremely deep-pocketed investor scouting for new deals in Hollywood as a result of AT&T’s acquisition of TCI.

Liberty will emerge from a series of transactions related to the AT&T-TCI deal as an independent company, nominally part of AT&T but controlled by Malone, with $5.5 billion in cash, plentiful borrowing capacity and use of $1.7 billion in TCI’s tax losses.

With this much firepower, much more than it has ever enjoyed, Liberty could be a candidate to buy Internet companies, startup cable networks, expand in international programming or even buy a Hollywood studio, industry execs and Wall Street analysts speculated.

Liberty now acts mainly as an investor in other companies, owning big chunks of Discovery Communications, Time Warner, QVC, USA Networks and Fox/Liberty Sports in alliances that put it in business with moguls like Barry Diller and Rupert Murdoch. Encore Media, which owns Encore and Starz movie channels, is its only fully owned business.

New startup assets

“What this presents us with is the opportunity to build new startup assets,” Liberty chairman and controlling shareholder Malone said in a conference call. Wall Street signaled it liked the deal by pushing up Liberty stock $2.12 to $38.18.

“The sky’s the limit,” said Rob Stengel, a partner in Continental Consulting Group. “Just about any programmer out there might be a target.”

“This is just masterful. He has got his cake and he is eating it, too. He has sold the cable business at a very nice price and now can concentrate on a whole new arena of programming,” said a cable exec.

Several industry pundits predicted Liberty would finalize long-running negotiations to beef up Encore by either acquiring Rainbow Programming from Cablevision Systems or buying Showtime from Viacom. Liberty has been in talks with both Cablevision and Viacom on both deals in recent months.

“Because of the ownership ties (between TCI and Cablevision Systems), Rainbow is a logical deal,” said Stengel. TCI owns about one-third of Cablevision.

But Liberty execs said they had not yet figured out what they will do with their newfound riches, given the speed with which the deal came together.

“That is what we are going to spend most of the next nine months trying to figure out,” said Liberty CEO Robert Bennett, referring to the period before the AT&T-TCI deal closes.

Bennett said he “would be surprised if we changed our fundamental stripes, which is viewing ourselves as an investor,” although he said Liberty would not necessarily restrict its investments to media.

Liberty’s transformation begins with the merger of the company with TCI’s investment arm TCI Ventures, a deal occurring parallel with AT&T’s acquisition of TCI’s cable systems.

That merger will add investments such as 85% of TCI Intl., 39% of United Video Satellite Group and a stake in Sprint Spectrum to Liberty. Two other major assets of TCI Ventures — a 3% stake in AT&T gained from the sale of Teleport earlier this year and 39% of Internet company At Home — will be transferred to AT&T-TCI for the $5.5 billion in cash.

Liberty retains independence

Liberty will become nominally part of the AT&T family but will retain its independence. AT&T is buying TCI and issuing a new class of AT&T Liberty stock to existing Liberty shareholders but that won’t change the ownership of Liberty.

“This is a fabulous deal for Liberty,” Malone said in a conference call, adding that if AT&T ever wanted to buy control of Liberty, it would have to pay for it. Otherwise AT&T’s alternative was to spin off Liberty as a separate entity.

The only limits on Liberty’s independence is its borrowing capacity — it can only borrow up to $6 billion without getting approval from AT&T. And beyond that, “we can borrow any amount we want as long as it doesn’t change AT&T’s debt rating,” Malone said, assuming Liberty can service the debt from its income.

Part of Liberty’s strength in the past was its ties to TCI, as the cabler often extracted equity in startup cable networks as its price for agreeing to carriage on its cable systems. Malone indicated that Liberty will retain the benefit of its ties to TCI even though the ownership of the two has now changed.

“An important part of this deal was working out how we can retain the synergies between network programming formation and distribution, and I think we have accomplished that,” Malone said.

The “magic” of the deal, Malone said, was that the $5.5 billion cash was transferred tax-free. Effectively, the TCI-AT&T merger enabled Liberty-TCI Ventures to sell two assets at multibillion-dollar profits without paying taxes because the sales are considered inter-company transfers.

Lehman Bros. analyst Larry Petrella predicted that with TCI Intl. now part of Liberty, the company may focus more on international programming investments.

Dennis McAlpine, analyst with Josephthal Lyon & Ross, can see Liberty expanding its sports holdings, which are currently plentiful, and investing in a cable news channel, a programming genre that Liberty does not own.