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With Time Warner Cable bid, Malone aims to be king of consolidation

Chairman of Liberty Media John Malone attends the Allen & Co Media Conference in Sun Valley, Idaho July 12, 2012. REUTERS/Jim Urquhart
Chairman of Liberty Media John Malone attends the Allen & Co Media Conference in Sun Valley, Idaho July 12, 2012. REUTERS/Jim Urquhart

By Ronald Grover and Liana B. Baker

LOS ANGELES/NEW YORK (Reuters) - Known as "The King of Cable" after he built a small Denver cable company into the nation's largest system in the 1980s, John Malone aims to become the king of consolidation in the same industry once again.

Charter Communications , in which Malone's Liberty Media holds a 27 percent stake, offered on Monday to pay $37.3 billion in cash and Charter stock to buy Time Warner Cable , merging the fourth-largest U.S. cable company with the second-largest and likely setting off more combinations within the $98 billion cable industry.

Time Warner Cable's board rejected the offer. If the two sides can work out a deal, the merged companies would provide service to around 16 million video subscribers, second only to Comcast , which has 22 million subscribers, and satellite provider DirecTV with 20 million.

Combining the two companies would serve large clusters of subscribers in New York, Texas and California, where they both have operations. That would give Charter more size to undercut telecom companies in the lucrative data service market.

A larger company could have the heft as well to roll out new video streaming services that might create a battle with Netflix and others.

"In prime time, about half of all the traffic on the Internet is Netflix or Amazon - in other words, it's video," Malone said in a July interview with the Denver Post. "As that trend continues, the need for greater capacity on the local distribution of the Internet really favors cable."

Malone, 72, has stressed in interviews that cable companies need to be larger to take on content owners such as Walt Disney , Twenty-First Century Fox Inc and others, who increasingly are wringing higher fees out of cable and satellite operators whose margins suffer.

Charter CEO Tom Rutledge said in an interview that he shares a common view with Malone "about the value that cable can bring in the marketplace if well executed."

BUILDING A CABLE POWER IN EUROPE

Charter's bid is similar to the decade-long European buying spree by Liberty Global , of which Malone personally owns 27.5 percent of its voting shares. Through a series of acquisitions, Liberty Global became the continent's largest cable operator with separate companies that have 20.6 million video subscribers in 12 countries, according to the company.

It also has 13 million European Internet subscribers and 11 million telephone customers.

Liberty Global's European mass has allowed it to invest in technology to increase its Internet speed to a very fast 100 mega bits per second or higher in most of its European markets. That contributed to what it said was a record third quarter addition of broadband customers.

In the U.S., Malone began to assemble the pieces for a larger company in March when Liberty Media paid $2.6 billion to buy a 27.2 percent stake in Charter.

Charter acquired Bresnan Broadband Holdings in July from Cablevision for $1.625 billion, adding operating systems in Montana, Wyoming, Colorado and Utah.

To give it flexibility to buy Time Warner Cable, whose market value is nearly three times that of Charter, Liberty said on January 3 that it would pay about $10 billion to minority shareholders to buy the stake in satellite radio provider Sirius XM Holdings Inc that it didn't already own.

The deal, which still must be approved by a panel of independent Sirius board members, would allow Liberty to take advantage of its cash flow and borrowing capacity to make the bid for Time Warner, Liberty Chief Executive Officer Greg Maffei told Reuters on the day of the announcement.

"That's one way it could help us get the Time Warner Cable deal done," Maffei said.

FAMILIAR STRATEGY

The strategy Malone is pursuing on both sides of the Atlantic is essentially the same strategy he used in the 1970s and 80s to build Telecommunications Inc from a nearly bankrupt Denver cable operator with 100,000 subscribers to the nation's largest at the time.

Malone, an engineer who has a PhD from Johns Hopkins in operations research, built the company for founder Bob Magness by striking deals to buy smaller operators throughout the country.

In 1991, TCI paid $142 million in cash to buy United Artists Entertainment Co, combining the two companies into the nation's largest with 10 million subscribers.

"He was just so smart about building that company when we dealt with him," said Tony Vinciquerra, former chairman of Fox Networks Group, which oversaw FX and other Fox cable channels. "When you sat down with him, he'd know more about your business than you did."

TCI's heft gave Malone the muscle to create value for his company beyond its subscription base. At that time, TCI's cable systems covered about 25 percent of the country.

As he was building TCI, he also invested in the Discovery Channel, American Movie Classic, and the Family Channel to help them get on the air.

In 1986, Malone put together a group of 14 cable operators, who paid $560 million to help CNN founder Ted Turner avoid bankruptcy after he had taken on too much debt to buy the MGM movie studio.

In return, TCI took a 21 stake in Turner Broadcasting Systems.

"John refers to himself as the philosopher king," said MoffettNathanson analyst Craig Moffett, who organized a meeting of Time Warner Cable shareholders before Charter's bid. "He spoke mostly about his long-term vision for the cable industry."

Charter's bid for Time Warner Cable makes it clear his vision includes larger cable companies, with the muscle to out-duel its online competitors.

(This version of the story removes extraneous word "cable" in the third paragraph)

(Reporting By Ronald Grover in Los Angeles and Liana B. Baker in New York; Editing by Ken Wills)

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