George Mannes

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AOL Deal Puts Malone Back on Shopping Spree

George Mannes

But what Malone will be doing with that money -- and its effect on the future of Comcast CMCSA, Hughes Electronics GMH and Vivendi Universal V, among others -- has Wall Street guessing.

On Thursday evening, the Malone-controlled Liberty Media L announced its intention to raise at least $1.5 billion by issuing 20-year notes exchangeable into AOL Time Warner stock.

Liberty, which holds 4% of AOL Time Warner's shares, thus will be raising money without actually having to sell shares it holds in the battered multimedia conglomerate. Such a deal is an unsurprising maneuver from the relentlessly tax-averse Malone. Now, as Wall Street awaits details of Malone's plans -- he may offer some clues on Liberty's fourth-quarter conference call with analysts, scheduled for next Tuesday -- the speculation about what will happen next covers a whole host of media industry possibilities.

Going Shopping

Although Liberty says the proceeds will be used for the boilerplate "general corporate purposes," the timing of the offer suggests that the entertainment and media company might have a specific venture in mind. After all, with AOL Time Warner shares bouncing around levels last seen in 1998, a patient man like Malone could wait to monetize his stake until he sees an improvement in the media economy, the proposed initial public offering of Time Warner Cable, or a sunnier Wall Street outlook on AOL Time Warner.

Thus, Liberty outsiders are forced to speculate which possible major transaction Liberty might be spending its money on.

Scenario No. 1 has Liberty preparing to purchase the balance of home shopping channel QVC that it doesn't already own from QVC's majority owner, Comcast. Earlier this month, Liberty said it formally initiated a process under which either Comcast or Liberty could end up buying QVC from its partner.

Complicating the issue on that front, however, is that Comcast has first dibs on buying 100% of QVC, once the owners settle on a price for the whole retailer. And as J.P. Morgan analyst Jason Bazinet pointed out in a note Friday morning, Comcast's 10-K filed Thursday indicates it can issue at least 250 million new shares without jeopardizing the tax-free status of its acquisition of AT&T Broadband. That gives Comcast plenty of room, says Bazinet, to acquire Liberty's QVC stake, should it desire.

Complicating the Liberty-Comcast relationship even further, Liberty separately announced Thursday evening that because of its ongoing dispute with Comcast over affiliation fees for the Liberty-owned Starz Encore cable channels, Liberty is cutting the revenue it's recognizing from Comcast by $9 million in 2002 and $80 million in 2003. The newer, more conservative approach led analysts to cut their numbers for Liberty on Friday. Salomon Smith Barney's Niraj Gupta, for example, dropped his target price for Liberty from $14 to $13.

Spruce Goose II

Another possible application of the AOL Time Warner money could be Hughes, parent of direct broadcast satellite operator DirecTV, subject to on-again, off-again speculation. Such a scenario would be good news for Hughes shareholders, since only one other company -- Rupert Murdoch's News Corp. NWS -- has been bruited about as a possible buyer for Hughes, and two possible purchasers are always better than one, as far as auctions are concerned.

In a Friday note, Merrill Lynch analyst Jessica Reif Cohen asserted that Liberty could conceivably acquire both QVC and DirecTV without injuring its investment-grade status. In addition to the $4.5 billion cash balance that Liberty would have after the AOL Time Warner offer, says Cohen, Liberty owns another $7 billion worth of nonstrategic equity assets, and could use the cash-generating QVC to support at least $4 billion in debt. Cohen has a buy rating on Liberty; Cohen or another analyst covering Liberty owns shares in the stock, as does Merrill or an affiliate thereof.

Another item on Liberty's shopping list could be all or part of Vivendi Universal Entertainment, the Vivendi subsidiary that operates Universal Pictures, theme parks and the USA Network and Sci Fi Channel programming channels, among other entertainment properties.

VUE, which Vivendi owns in conjunction with minority shareholders USA Interactive USAI and Barry Diller, is likely to be unloaded in some form by Vivendi, though the timetable on that process is unclear.

And yet another destination of the AOL Time Warner cash could be a share repurchase program. Gupta, for one, was rooting for that option Friday over any purchase by Liberty, on its own, of DirecTV or VUE assets. Those possibilities, wrote Gupta, "are less attractive means of shareholder value creation." Gupta, who owns Liberty shares and whose firm has received banking fees in the past year from Liberty, has an outperform rating on the company.