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John Malone says the word that's music to investors' ears: spin-off

Snoopy was right. It's a dark and stormy night out there. First terrorism, then war, then homeland security, with its ever-changing colors, then more war. And now, something we haven't seen since those dark periods between 1971 (end of the gold standard) and 1994: a selling panic in the value of the dollar.

And so it was a breath of fresh air when John Malone and his Liberty team addressed analysts at the company's spring briefing May 15 at the Hudson Theater in New York. Most of the press reports last week focused on Malone's desire to buy QVC from Comcast and the Universal film/TV assets from Vivendi, and the prospects of a spin-off of Liberty's global assets.

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Ah, spin-off, how long we've waited for the return of your sweet potential. Malone's many dividends were so good to his TCI shareholders that if you had sold each for cash and reinvested in the mother ship, you could have earned a 1,000,000% return over a 25-year period. Not bad for just one generation.

* * *

As usual, in between the blockbuster sound bites, Malone hid verbal gems like financial Easter eggs, to be discovered in the hunt for inherent value. Here's a sampling:

"Why are businesses less valuable than before? It's the bond industry - 6x cash flow used to be considered investment grade, but now it's only 3x. The banks are also at fault in this. If a business is worth 12x, then three-quarters of the value is equity and only one-quarter is debt, despite these times of such low interest rates. The trouble is, you can't get acceptable equity returns at only 3x leverage. So we could place our international assets off our balance sheet, giving our shareholders an opportunity in a more highly leveraged vehicle with a minimum of risk.

"UnitedGlobalCom is still pushing 7x cash flow on bank debt. At 6x, with organic growth and free cash flow, that isn't bad. But you can't consolidate it with a Liberty that's trying to stay at 3x to retain its bond rating. Maybe our shareholders should own it.

"We did it [spin-off] when we established the first Liberty. We did it with Western TCI into Marcus, with GCI and with TCI Ventures. [P.K. d?j? vu note: Focusing on Europe, Japan and South America, Malone is essentially setting up Ventures II.] We have a long history of spin-offs. Certain businesses require a certain amount of high leverage in a period of low interest rates. Besides, how do you get doubles and triples in a world where equity can't be leveraged? In my personal portfolio, I want doubles and triples. Mario Gabelli does it all the time. [Laughter from the audience, because it's true.] That's what characterized the first Liberty. This is L4!

"Inside Liberty we ought to create a global vehicle to de-consolidate equity. Gene [Schneider] and Mike [Fries] will be able to refinance and we won't want it on our balance sheet." Ribbing one of his favorite lending groups, Malone added: "Banks can have 85% leverage on their equity, but we can't."

* * *

Some people who heard the news were unable to decipher Malone's signal, but his comments, at what is likely the beginning of the next bull market, are no different than those he voiced at the start of the last one. Said one perplexed trader on the Liberty Yahoo! message board May 20: "I thought they were going to simplify things for us slow investors. Why don't they just get rid of the damn assets and buy back some stock like they've promised to do at least twice in the past year?"

Indeed, Malone has always threatened (not promised) to shrink his equity with stock buybacks if investors didn't respond to his value-building efforts. But those opportunities have been rare. Most recently, through a rights offering at $6, he gave investors a chance for a 90% move in six months, to $11.40 on May 16.

There was no talk in Liberty's presentations about the continued decline in the value of the dollar, but it will only help the investment prospects of Malone's offshore moves. And, looking further out, a leveraged UnitedGlobal would be in an excellent position to acquire the poster children of Britain's cable/satellite war: NTL and Telewest.

One other message from Malone: Most people think that when you "monetize an asset" it means you turn it into cash and leave the scene. To Dr. John it means gaining further leverage for acquisitions. "We always want inexpensive, quick access to the capital markets," he said, "to be able to monetize our investment position. We have to be credit-worthy because otherwise, to get money you have to sell things and pay taxes, and that's not very attractive." The Lone Ranger rides again.

Analyst Paul Kagan writes exclusively for Cable World. He is an active investor and money manager and often owns securities mentioned in his columns. He owns shares of Liberty Media, UnitedGlobalCom and NTL. He may buy or sell before and after the columns are published, and his positions may change at any time. Information in his columns does not represent a recommendation to buy or sell securities, nor is it a solicitation of any securities transaction.

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John Malone says the word that's music to investors' ears: spin-off

Cable World, May 26, 2003

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