Liberty banks on TW

Company to raise $1 bil in secured-bond offer

NEW YORK — John Malone’s Liberty Media is expected to go to market shortly to raise at least $1 billion through bonds secured against its 9% stake in Time Warner, sources said Friday.

Money raised will increase Liberty’s cash reserves to $5.8 billion, while the offering renews speculation about Malone’s plans for the programming company, which he controls despite its ownership by AT&T.

Liberty execs dropped broad hints about the upcoming bond offering at an investor conference in New York on Thursday. Liberty CEO Robert Bennett told the conference, “You will see us go into the marketplace for some debt instruments while rates are still cheap … to bring more cash and liquidity into the company at a very attractive long-term fixed-rate basis.”

Reviewing option

The company revealed it had recently entered into an elaborate option arrangement regarding a small part of its Time Warner stake, which has a market value of $8.4 billion, to help it raise money against the TW stock.

The arrangement, known as a “collar,” gives Liberty the option over the next seven years to sell 15 million TW shares at $67.45 to a group of institutional investors, while the investors have an option to buy the same shares at $158.33 over the same period. Liberty owns a total of 114 million TW shares.

The option arrangement means Liberty is protected if TW shares fall below $67.45 over the next seven years and is guaranteed at least $158.63 a share if the TW stock rises over the same period. Time Warner shares closed down $2 to $70 on Friday, while Liberty stock fell $1.12 to $72.12.

Bennett said Thursday that the arrangement enables Liberty to borrow against those shares, knowing the stock “isn’t going to be worth less than $1 billion.” The bonds sold in the offering will have a life of seven years, matching them up with the life of the option arrangement.

Cash consideration

Liberty has considered undertaking such a financing arrangement against the TW stake for some time, as Liberty acts mainly as an investor in other companies and has very little of its own income to borrow against.

Sources said the company had contemplated raising between $2 billion-$3 billion from a bond offering, but would more likely raise $1 billion to $1.5 billion in coming weeks, and could raise more money later.

Malone said Liberty would also consider a similar financial arrangement using its 24% stake in Sprint PCS, now worth $4.6 billion.

Despite the elaborate financial engineering, Liberty execs made clear that they had no particular plans in mind for the cash. “What are we going to do with all that cash? We don’t know exactly,” Bennett told investors.

But Liberty would like to have the cash to move fast on a deal. In early April, Liberty committed to spending about $1 billion to buy a stake in News Corp. and increase its stake in General Instrument. Both these deals “came up very quickly,” Bennett said.

Malone noted that the economics of the collar and the accompanying debt issue would allow Liberty to buy more Time Warner stock, although it was not clear whether this is a serious option.

Aside from the 9% stake in Time Warner, Liberty has agreed to buy 8% of News Corp. It also owns 21% of Barry Diller’s USA Networks, half of Discovery Communications and all of Encore Media Group.