Against a backdrop of increasingly worrisome operational and financial problems at AOL Time Warner, John Malone, chairman of Liberty Media, may be looking to take a more active role at the company.
Investors have grown increasingly disenchanted with what appears to be a pattern of a lack of disclosure of company liabilities ? or surreptitious disclosure. One glaring example involves the financial liabilities associated with AOL TW's purchase of a part of AOL Europe it does not own. AOL is paying a total of $6.75 billion to buy Bertelsmann A.G.'s 49% stake in the venture. When AOL TW confirmed the purchase earlier this year, analysts were surprised at the magnitude of the unit's losses ? $600 million on $800 million in revenue last year. What the company failed to disclose, however, is that it would take on $573 million in AOL Europe's debt and $758 million in redeemable preferred securities outstanding. That detail was first released in AOL's annual report, filed last week.
Surprises related to the dissolution of its I-Planet joint venture with Sun Microsystems and AOL Latin America are contributing to investors' unhappiness.
The perception that's grown is that AOL TW is spending billions in shareholders' money to make big chunks of cash flow go away.
?AOL TW has expanded its level of disclosure [and is] providing more detailed information,? said Tricia Primrose, a corporate spokeswoman. ?We've been very open in the past, and we will continue to be so.?
Liberty owns 3.9% of AOL TW, but its shares currently have no voting rights, according to the terms of a 1997 Federal Trade Commission consent decree. Under that decree, Liberty, which at the time was owned by Tele-Communications Inc. (TCI) was prohibited from participating in decision making at Time Warner because the two companies were the Nos. 1 and 2 cable systems operators. The FTC decree stripped Liberty's stake of its voting rights. Following Liberty's August 2001 split with AT&T Broadband, which bought the TCI cable systems in 1999, any of the ?competitive harms? the decree sought to address were eliminated, Liberty contends, and it should have the right to vote its shares as well as the right to expand its ownership.
Despite the growing concern on Wall Street over AOL Time Warner's troubles ? its stock has lost more than half its value since last June as management's credibility with shareholders has diminished ? the timing of Liberty's request is purely coincidental, Liberty says. The request for restoration of Liberty's voting rights had been planned since the spin-off from AT&T, according to Mike Erickson, a Liberty spokesman. Malone was unavailable for comment.
The news sparked a flurry of speculation among Malone watchers in the cable industry, particularly since the FTC request follows Liberty's failure to acquire several German cable systems, meaning Malone may be looking for his next big move. Liberty is still in talks with staggering U.K. cable operator NTL and may end up with a large equity stake.
?I think John remains very interested in Europe,? said Matthew Harrigan, an analyst with Denver-based research firm Janco Partners. ?There is plenty to keep the company occupied over there.?
?John Malone is simply bored,? said one highly placed cable executive who has worked closely with Malone in the past. ?He wants something to do.?
AOL TW looks substantially weaker today than it did a year ago, despite its standing as the No.1 media company in several categories. In its annual report, it said it stands to lose as many as 2.3 million cable customers if Advance/Newhouse walks away from a partnership with Time Warner Cable. That would leave TWC, which is the company's second-largest generator of cash flow, with a huge gap in earnings. If the partnership is dissolved, TWC would also be forced to include the money-losing Road Runner high-speed Internet access service in its consolidated results, which would further depress cash flow.
AOL disclosed in its Securities and Exchange Commission filings that, in order to meet its growing financial requirements, it could slow down its stock-buyback program, which may further diminish its credibility with investors.
One institutional investor who asked to remain anonymous said investors are angry with the company's performance, and many are beginning to wonder why the merger ever took place in the first place.
?Time Warner is fine. [America Online] is in trouble,? he said, referring to the slowdown in subscriber growth and the lack of deals with cable operators for the unit's high-speed Internet product. ?I don't think John Malone wants to do anything at this point, but he, just like every other investor, is not happy. I don't think he can get on the board, there are still too many conflicts ? his stock in News Corp., for instance. But it'd be nice to have the ability to vote his shares.? (Among Liberty's myriad holdings is an approximate 18% stake in News Corp.)
It makes sense to get the voting rights now when the company has no specific agenda, said another institutional investor, rather than wait until Liberty or Malone decide they want to exercise some serious clout. If Malone can overcome the conflicts and agitate enough to obtain a seat on the board ? AOL is reducing the number of directors on its board to 15 effective with Jerry Levin's retirement in May ? he would join his old ally Ted Turner, who was persuaded by CEO-elect Richard Parsons to remain with the company as vice chairman. Turner owes a lot to Malone, and the two executives have a long and prosperous history. Malone was the driving force in bailing out Turner when he almost went bankrupt buying the MGM Library in 1987.
While AOL TW management insists the shuffling in the executive suite is simply a matter of putting the right people in the right places after the mega-merger, that Gerald Levin elected to stay on in an advisory role through 2005 has some industry observers thinking he may be needed to keep the peace between the AOL and Time Warner camps.
Several industry experts interviewed for this story scoffed at speculation that Malone may be up to something. ?I don't think there is any skullduggery going on here,? said another executive who has worked closely with Malone for years. ?He's a smart guy, and sometimes he has strategies that are multilayered. But sometimes he just does things because they make sense. This makes sense. There is no reason not to have the right to vote those shares. Not everything he does is a conspiracy to take over the world.?
Other executives agree, although at least one industry expert said dismissing Malone's actions at any time can be a mistake.
Some analysts discount the notion that Malone could make much difference, at least acting alone. ?Four percent isn't enough to cause much trouble,? said Bear Stearns analyst Ray Katz. ?I think this is one of the biggest nonpress events of the year.? (Liberty also owns 4% of Primedia, publisher of Cable World.)
Still, Malone could easily build a consensus among institutional investors that have known and trusted him in the past. Some industry observers believe it wouldn't be hard for Malone to convince some heavy-hitting investors to work with him should he decide to become more heavily involved in the company's decision making. He also could join Turner, AOL TW's largest individual shareholder. And if Malone and Turner somehow teamed with the Newhouse brothers, they could practically take the company private.
Janco's Harrigan says 4% may not buy a lot of pull, but Malone's reputation and name recognition bring their own brand of power to the table. ?He is simply looking out for his investment,? added the executive with close ties to Malone. ?Any investor would do the same.?
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