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Freely Associated

TCI investor to get Liberty stock in $2 bil taxless gain

NEW YORK — John Malone’s Liberty Media Group will pay $3 billion in stock to acquire investment company Associated Group, which had been one of the oldest and biggest outside shareholders in cable giant Tele-Communications Inc. until TCI’s acquisition by AT&T in March.

The acquisition, disclosed Tuesday, will enable Associated to realize $2 billion in gains it has made on its holding in TCI and related companies, including Liberty itself, without paying taxes, Wall Street analysts said.

In a statement, Associated chairman Myles Berkman said the deal was “the culmination of 20 years of value creation for our shareholders.”

Liberty gets Teligent

Liberty will also inherit Associated’s 41% stake in niche telco operator Teligent, although analysts predict Liberty will eventually transfer the stake to its parent company AT&T. (As a result of AT&T’s acquisition of TCI, which was affiliated with Liberty, the telco giant owns Liberty, but it is still controlled by John Malone).

Teligent offers telephony services and Internet access to small businesses. The acquisition sent Teligent’s stock price soaring $5.43, or 11%, to $54.56 Tuesday.

“All of us at Teligent are very excited about the opportunity to work closely with one of the communication industry’s pioneers, John Malone,” said Teligent chairman Alex Mandl in a statement.

Wall Street did not appear to like the deal’s impact on Associated, however, as its stock plunged $2.75 to $62.25, while Liberty stock also fell 18¢ to $66.25. Lehman Bros. analyst Larry Petrella said investors’ reaction may reflect the $67 a share value of the offer compared with valuations on Associated as high as $85 a share.

Most tax-efficient deal

But Petrella said Associated’s potential tax liabilities on its investments meant there was likely “no other buyer” which could do as tax-efficient a deal as Liberty or AT&T.

Liberty is offering a mix of AT&T and Liberty shares to pay for Associated, although the true cost to Liberty is substantially reduced because Associated’s major assets are its stakes in AT&T and Liberty.

Liberty noted that the $1.08 billion in AT&T stock it is offering is equivalent to the amount of AT&T stock held by Associated, which effectively cancels out the stock being issued.

True cost reduced

Similarly, while Liberty is offering $1.7 billion of its own stock to Associated shareholders, Associated’s existing stake in Liberty will reduce the net new Liberty shares to be issued to $759 million. With $187 million of debt to be assumed, the true cost of the acquisition is close to $900 million.

Liberty’s offer “could have been higher,” said money manager Sal Muoio, of SM Investors.

But as Lehman’s Petrella noted, Associated was facing enormous tax liabilities from the big profits it has made on TCI stock over the years. Another buyer of Associated could not have sold the stakes without triggering those liabilities.

Associated said in a recent SEC filing that it had marketable securities of $1.6 billion as of Dec. 31, with a cost of just $6.9 million, reflecting largely its TCI investments. In an SEC filing earlier this year, before AT&T completed the TCI deal, Associated was listed as owning a 4.64% voting stake in TCI.

The big question is why AT&T did not make the acquisition directly. Analysts said Malone likely negotiated the deal himself because of his long relationship with the Berkman family, which controlled Associated. AT&T declined comment, and neither Liberty nor Associated returned calls seeking further comment.

In a statement, Liberty CEO Robert Bennett said the deal “allows us to obtain an attractive investment in the very exciting and rapidly growing business of Teligent.”