John Malone, the Liberty Media Group chairman and long-time telecommunications dealmaker, has said in several reports in the last week that regulations had been preventing his company, while combined with AT&T, from entering into certain investments that could have been beneficial for Liberty. Malone has always considered his company--a cable programming and investment concern--autonomous from AT&T, even though he is Ma Bell's largest individual shareholder.
When AT&T announced Wednesday it plans to spin off Liberty Media, it said the move was "consistent with the rationale behind the company's recent decision to restructure into four companies" announced two weeks ago. But the maneuver also has the potential to satisfy a significant regulatory obligation the company faces from its purchase of MediaOne Group.
AT&T to spin off Liberty Media
Gary Jacobi, analyst, Deutsche Banc Alex Brown
This latest chapter in the ongoing saga of AT&T and Malone underscores both the deal-making expertise of the telecommunications and cable veteran and the dire straits of one of the United States' most revered and recognizable companies.
If the Federal Communications Commission and the Securities and Exchange Commission find no faults with AT&T's Liberty spinoff plan, Malone will have full autonomy while having freed himself from the regulatory restrictions so common to AT&T and the telecommunications industry as a whole. For Malone, the deal will be the latest example of him managing to make a buck while evading the long grip of Washington.
Al Gore used to get so frustrated with Malone's success in evading cable-rate regulations when Malone was running Tele-Communications Inc. (TCI) and Gore was a U.S. senator, that in a congressional hearing Gore once compared Malone to Darth Vader.
"There's a reduced regulatory overhang" that comes with escaping AT&T's orbit, Liberty Media chief executive Robert Bennett said in an investors' briefing Wednesday. He specifically cited the FCC and antitrust regulators, adding that those burdens "occasionally have caused us not to pursue opportunities."
One new opportunity that Liberty Media will be able to pursue more easily is its proposed investment in News Corp.'s Sky Global satellite service--culminating in an 18 percent Liberty ownership of News Corp.--in exchange for 80 percent of Liberty's interest in Gemstar-TV Guide. News Corp.'s Rupert Murdoch has positioned Sky Global as a satellite competitor to cable.
Liberty's investment in Sky Global was unsettling to AT&T because the service competes directly against its cable services. It also raised eyebrows with federal regulators concerned with the notion of a paired AT&T-Liberty Media playing such a prominent role in video services.
"I think he has landed on his feet again," Yankee Group analyst Sandra Palumbo said of Malone's legendary business success. She said Liberty gets more out of the spinoff than AT&T.
As part of the approval of AT&T's acquisition of MediaOne, AT&T voluntarily agreed to unload Liberty Media or its 25 percent stake in Time Warner Entertainment or about 10 million cable subscribers.
"They would have preferred none of those options," Palumbo said.
In fact, the company launched an aggressive lobbying campaign and has sought an exemption to the cap limiting how many homes a cable company can reach, which would relieve AT&T of its commitment. While Congress has yet to adjourn for the year, most observers consider it unlikely the company will succeed in its last-minute legislative efforts.
"Of the options the FCC gave AT&T," Palumbo said, "getting rid of Liberty was probably the most viable."
When AT&T bought TCI and Liberty Media, Malone--who also became an AT&T director--insisted on language that gave his Liberty Media great autonomy, including the right to compete directly with AT&T.
Malone has been concerned with the tax implications of a spinoff, but this concern has lessened as he has watched his AT&T stock decline. A spinoff gives Malone a way to separate himself from AT&T's poorly performing stock.
One benefit to AT&T, or at least to chairman C. Michael Armstrong, may be getting the feisty and opinionated Malone off the AT&T board, although such a move hasn't been announced. While refusing to speculate directly that personality conflicts played a role in the spinoff, Palumbo said, "You never know when politics are involved."