Liberty Media tossed its hat squarely in the bidding ring for control of Vivendi Universal Entertainment on Thursday, as company chairman and financial mastermind John Malone laid out his strategic mission to transform Liberty’s disparate holdings into a more cohesive content platform.
Speaking at the company’s annual investors meeting in Gotham, Malone and his trusted lieutenants prexy-CEO Bob Bennett and exec veepee-chief operating officer Gary Howard reiterated Liberty’s commitment to monetize its extraneous minority holdings in noncore assets and use the resulting cash to make major strategic acquisitions. Liberty also said it would look for opportunities to increase its investment in existing businesses such as Barry Diller-helmed USA Interactive, in which Liberty has voting control, and News Corp.
Liberty has previously stated its interest in VUE with a view to achieving vertical integration and scale as well as to enhance the value of its wholly owned pay TV operation Starz Encore. But Malone’s candid review Thursday of Liberty’s strategic imperative in light of its drooping share price was the clearest indication yet that he intends to transform Liberty’s portfolio of public and private equity positions into a powerhouse programming platform.
“The issue for Liberty is what we do with all this firepower,” Malone said of the company’s ample liquidity and financial flexibility, adding that he was optimistic about chances for buying control of QVC from partner multisystem operator Comcast.
“The most attractive part of the VUE opportunity is the large block of Barry’s stock which is illiquid to Viv U,” said the ever-arcane Malone.
Vivendi Universal is “mired in deferred tax liabilities and contractual obligations. This gives us an opportunity since we’ve never been shy of complexity,” Malone quipped.
“There’s an opportunity here to untie a nasty Chinese puzzle … and we may be uniquely positioned to deal with this situation,” Malone said, alluding to Liberty’s ability to leverage its stake in USAI — which itself holds 5.4% of VUE (Diller has a personal 1.5% stake) — in a deal to extract control of the assets while allowing Diller to monetize his position tax efficiently.
Malone was coy on the question of whether DreamWorks partner Jeffrey Katzenberg (a Diller protege) could be part of a wider deal but hinted that talks about the former Disney exec’s involvement has taken place.
Getting warmed up
Malone said buying the VUE package of production and cable channel assets would be just the beginning of a more extensive push into content distribution. “If we do a Viv U deal, we’d be more inclined to be a buyer than a trader (of channels) … VUE would allow us to pull in more distribution outlets.”
At a packed three-hour session with institutional investors and Wall Street analysts Thursday, Howard and Bennett outlined key initiatives in keeping with the Liberty operating pillars of tax efficiency as asset leverage, risk hedging and, more recently, structural simplification of its business.
Always a finance jockey’s dream, the review of the Liberty portfolio reveals just how well many of Malone’s bets have paid off. His initial $1 billion investment in News Corp., for instance, has grown to a market value of $6 billion, while its $2.4 billion investment for a 20% stake in USA Interactive is now valued at $4.8 billion. Even riskier bets like Motorola and AOL Time Warner have been hedged to the extent that Liberty has been able to protect its downside. However, the company acknowledges that even its geniuses at work on the trading floor couldn’t fully protect it from the current bear market.
Though securing VUE is just one of Liberty’s options as it buys and sells its way to a more harmonic organizational and operating structure, it’s clear the company is amassing a suitably large cash pile with which to do a large deal.
Thanks to a strong balance sheet, Liberty’s acquisition arsenal is impressive. The company has approximately $5.3 billion in cash equivalents, with the potential to liquidate another $10 billion “with minimal tax leakage.” That treasure trove of $15 billion comes before Liberty even considers tapping the debt market. Liberty’s current corporate net debt load of $3.62 billion is at an enviable pretax cost of 4.5%.
“The challenge is to use our resources to create more assets,” said Bennett, adding that the company would work to convert its passive public holdings into controlling positions in operating companies in an effort to make Liberty less complex.
In addition to rolling up some smaller subsids while pruning others, Bennett said he hoped Liberty would be able to buy out Comcast’s stake in jointly held QVC. Independent appraisers are currently valuing the home-shopping net while the cabler decides whether it can afford to be a buyer or a seller of what Liberty describes as a cash machine.
Malone, however, said he would happily take Comcast stock if forced to sell Liberty’s 42% stake in the prized channel.
Liberty also suggested it may attempt to parcel off its higher-leveraged growth assets such as cable ops UnitedGlobalCom, Jupiter and UPC, either through a rights issue or other spinoff means, in order to allow those companies to access debt for expansion purposes without harming parent Liberty’s investment grade debt rating.
Malone also talked about short circuiting “the deadly cycle” of rising sports costs and predicted that either Congress “or a courageous Brian Roberts” (CEO of Comcast) would eventually break the cost escalation that has created a major distortion in the entertainment economy. “Somebody has to say no to this underlying sports machine (which has led to) outrageous player salaries,” he said.
Citing the recent resolution of the YES carriage dispute in New York that resulted in a tiered offering, Malone said that in the end, consumers must be the ones to decide for which channels they will and won’t pay.