November 20, 2000

Liberty for Malone

MAVIS SCANLON

John Malone is closer to being free.

AT&T said last week it plans to spin off Liberty Media Group, a move that would release Malone, Liberty's chairman, from the fetters of AT&T's board.

Malone has intimated for weeks in interviews that the benefits initially seen in linking with the telecom giant have deteriorated, especially since AT&T has leveraged up its balance sheet.

Analysts expect Liberty would move aggressively once it is unshackled.

"This is a company that relies on forging relationships and making investments" to leverage itself off other cable channels or properties, says James Linnehan, a telecom analyst following AT&T at Thomas Weisel Partners.

"We know (Malone) is interested in gaining access to more broadband initiatives," he adds.

On a conference call with analysts discussing Liberty's third-quarter results, Robert Bennett, Liberty's president/CEO, offered a glimpse of the direction the company would take, although he pointed out that Liberty's basic approach to its business would not change as a result of a spinoff.

Liberty is "devoted to the combination of content, last-mile distribution and technology," Bennett said. "I don't anticipate having ... material changes" to that strategy.

Liberty would be interested in acquiring AT&T's ownership stake in Time Warner Entertainment, Bennett said. Judging by Liberty's position in Time Warner - Liberty owned 9% of the programming and cable giant as of Aug. 31 - "We would be interested in increasing our position, but that is not something that has been offered to us," he added.

An independent Liberty also would be free of the regulatory overhang that encumbers AT&T and would have what analysts termed a "cleaner currency" - its own stock - with which to pursue acquisitions. AT&T is fighting for increased ownership caps for its cable operations.

A spinoff also reduces potential conflicts of interest. Through its investments in certain satellite and wireless technologies, Liberty is said to have rankled AT&T brass. A spin-off would free Liberty to continue its path to acquire interests in three main areas: content, the so-called "last-mile" distribution, or the connections into end-users homes, and technology. There would also be a much simpler administrative structure than Liberty currently has as an unconsolidated subsidiary of AT&T.

One investment area Liberty may be unlikely to pursue - at least for now - is competitive local exchange carriers (CLEC). In February, Liberty invested $500 million in telecom company ICG Communications; last week ICG filed for bankruptcy protection from creditors.

There has been a dramatic change in the capital markets for these businesses, Bennett said on the call.

Their business plans have been a lot more questionable, he added, "and a lot more difficult to execute than earlier this year." That has "dampened our enthusiasm to look for new opportunities there."

A Liberty spinoff would satisfy FCC requirements imposed on AT&T when it purchased MediaOne earlier this year. At that time, AT&T was given three choices: shed its stake in Time Warner Entertainment, a programming partnership with Time Warner, sell some of its cable assets, or sell or spin off Liberty.

Late Wednesday, AT&T was hedging its bets in case the IRS returns a negative opinion - a spokeswoman said the spinoff was not necessarily AT&T's final decision as far as satisfying the FCC divestiture.

"We have until December 15 to advise the FCC" on our decision, says Eileen Connolly, an AT&T spokeswoman. "This announcement in no way limits or signals the option we will ultimately pursue."

AT&T acquired Liberty through its March 1999 purchase of cable giant TCI. At the time, the deal was seen as a boon for Malone, long known for his financial and deal-making acumen, and Liberty, which is ultimately controlled by Malone through his ownership of Liberty's class B stock.

As an immediate benefit, Liberty would likely receive a cash payment of roughly $2 billion from AT&T as a result of the spinoff.

The payment, the result of net operating losses that Malone carried on TCI's books and that Liberty was able to use for tax purposes, would net down to about $800 million after taxes. AT&T must buy those benefits for cash as part of its contract with Liberty.

The proposed spin-off, scheduled to take place during the second quarter of 2001, is subject to a favorable tax ruling from the IRS. Under IRS rules, a company can't spinoff or sell assets for two years after an acquisition. If and when if happens, AT&T will convert the Liberty shares into a new, publicly traded stock and will own no stake in the company.