GATHER ROUND THE HEARTH AND LISTEN TO THE TALE OF THE TWO DEAL MAKERS

PAUL KAGAN

In a world still smarting from multiple attacks on our value system (both social and financial), we've once again been taught a lesson by those two consummate deal makers, John Malone and Brian Roberts. The way they handled the July 3 settlement of QVC ownership should be told and retold to your grandchildren and their children.

Eight-and-a-half years ago, in February 1995, Liberty and Comcast entered into a home shopping partnership that contained a forced buy-sell clause (before there was a real war, it was called a ?shootout?). When Liberty triggered the clause this year, it might have come to obligatory blows between opposing appraisers. But before the deadline was reached, Comcast agreed to sell its 57% stake in QVC for $7.9 bil., 20x the $384 mil. it invested since it helped launch the network in 1986. That's a profit of over $7.5 bil., not including cash flow QVC may have thrown off in the interim.

How smart was Comcast when it took QVC private in 1995? It pegged the value at $2.5 bil., or 10x '95 estimated cash flow of $255 mil. In this month's deal, the value is nearly $14 bil., 13x '04 cash flow of an estimated $1.1 bil. Wait, it gets better.

When the public stock of QVC was bought in 1995, the shopping network came with $133 mil. of cash in the bank and $241 mil. of option-exercise cash. And it was able to get a bank loan of $1 bil. to help its new owners make the purchase. So, in 1995, when the partners already owned 34% of QVC, they had to invest only $287 mil. of equity cash (Comcast's portion was $267 mil.) for the public's $1.66 bil. worth of shares.

QVC shareholders at the time thought the 10x buyout multiple was light, versus 20x values placed on other cable networks. And in the ensuing years, QVC cash flow proved them right, compounding at an annual rate of about 17%. Hindsight shows the present value of QVC was over $6 bil., not $2.5.

As you tell this story to your progeny, shed no tears for any of the players. Exiting public shareholders, had they reinvested their cash in Comcast, would have enjoyed a tenfold gain within five years, probably better than QVC would have done on its own. The $20 mil. John Malone paid for an additional 25% of QVC in 1995 is now worth over $3.4 bil. Despite the seemingly high price now, Malone has billions more cash at his disposal to take a run at Vivendi's Universal Studios and cable network assets. And in case he doesn't win that auction, QVC helps turn his holding company carrier into the operating battleship he wants it to be. He's also unafraid of debt-heavy Comcast dumping his stock for cash. Brian Roberts told Bloomberg July 11, while in Sun Valley at the Allen & Co. media conference, that ?there will be no pressure? to sell the shares. ?They own a lot of cable programming and a lot of QVC and we like both of those.? No single quote has ever better expressed the deal and value mentality of cable operators. It also implies he thinks the eventual price of the deal will go higher.

As for Comcast taking paper ? $5.3 bil. in a three-year note and $2.6 bil. in stock (220 mil. shares at $11.71) ? I think it's really colored green. Based on their past history, they'll find ways to monetize the notes and the shares in stages. Average investors are scratching their heads over this deal, but it's vintage cable. It has lots of moving parts and creates new, underlying equity value even while you're sleeping.

Traders of cable debt aren't surprised by this kind of activity, although the equity stock market tends to forget. Back in June 1997, when Roberts got Bill Gates to invest $1 bil. in Comcast, Malone engaged in a lower profile but somewhat similar paper exchange with Cablevision's Chuck Dolan. They swapped 820,000 of Malone's subscribers for Dolan's stock. In a very depressed market, the subs traded at $1,333, but were worth at least $5,000 two and a half years later. Malone's TCI shares traded at only $17 in 1997 but were worth $78 when the AT&T deal closed in 1999. Send your grandkids off to bed with this last stat: Cablevision's stock was only $35 when the trade was done in 1997. By 2000, it topped out at $367, unadjusted for two 2:1 splits in 1998. Some people say it was just a craze, but it wasn't for those who believed when the days were darkest.

Anybody see any sun lately?