John Malone Finally May Get His Wish

Mar 02 2001

John Malone is known throughout the communications industry as one of the most intelligent, willfully independent, manipulative and opinionated businessmen. Those traits served him well throughout much of the '80s and '90s as the head of TCI Cable. But since ATT bought TCI and brought Malone onto the company's board of directors, rumors keep cropping up that Malone has been looking to extricate himself from AT&T.

AT&T announced in December that Liberty Media, the AT&T tracking stock that doubles as John Malone's investment company, would soon be spun off as an independent company. Now, published reports indicate that Malone might leave AT&T's board altogether once the spinoff takes place.

Malone clearly wants to be free of his relationship with AT&T and the constraints that go along with it. It appears that the main reason Liberty belongs to AT&T at all is so that Malone and company can avoid having heavy taxes levied on their investment income. But in return for the tax shelter, AT&T has stipulated that Malone can borrow only up to 25 percent of Liberty's stock market capitalization, so as not to unduly drag down AT&T's credit rating. Unfortunately, Liberty has lost more than half its value from the company's year's high, trading currently around $14, which cramps its ability to raise capital.

Clearly, Liberty Media would like to be free to raise more working capital for itself. If Liberty and AT&T can get a favorable ruling from the IRS that will afford Liberty a tax shield similar to the one it currently enjoys, Malone and company hope to sail off, free and unfettered, from AT&T to rampage across the telecommunications and media industry and to turn obscene profits.

The IRS' favor also would free Malone, AT&T's largest single shareholder, from his duties on the AT&T board, which has not been a productive engagement for him. His stake in the company has shrunk immensely since he came aboard, as AT&T shares have dropped from a high of around $60 to about $22 on Friday. He has been among the most vocal proponents of complex financial and structural changes aimed at increasing the value of his AT&T shares, and now that AT&T has split itself into four separate companies, there's seemingly little else for a financial engineer like himself to do.

Liberty Media has not done well of late, but Malone has one of the best track records in the industry, and he's been investing for decades. He may be suffering continuing losses as the telecom sector gets hammered, but AT&T will push hard to get the Liberty spinoff to happen because it will persuade regulators to let the telco giant complete its merger with MediaOne cable. If anyone can persuade the IRS to let Malone go unfettered, it is AT&T.

If the IRS plays along, Malone will emerge the big winner in his tug of war with AT&T. He will be free of its shadow, unencumbered by contractual stipulations and free from tax woes, all thanks to AT&T's help. His bad string of investment luck aside, Malone will have proven himself to be the most canny of businessmen - using AT&T to send Liberty off to forge ever bigger deals, with little interference.