Expect gradual, not dramatic, changes in Liberty Media Corp. resulting from AT&T Corp.'s formal decision to completely spin the programming investment company away. In the least surprising corporate move of the year, AT&T declared last Wednesday that it will give Liberty Media its freedom, separating the company entirely from the telco's other operations. Liberty has been a "tracking stock" subsidiary of AT&T ever since the telco acquired Liberty's old parent Tele-Communications Inc. last year.
By all accounts, Liberty Chairman John Malone has tremendous independence in managing the company, and AT&T Chairman Michael Armstrong tries to keep his distance. But the assets of Liberty are nevertheless technically owned by AT&T, with owners of the tracking stock entitled to the economic benefits that come from them.
But Malone has become increasingly unhappy with AT&T, partly because his own multibillion-dollar holdings have sunk 66% and also because AT&T's conflicts with regulators were entangling Liberty's holdings. So he has been pushing for a total separation.
For example, Liberty is considering backing a News Corp.-led bid for DBS service DirecTV and its parent, Hughes Electronics. Antitrust regulators would probably not approve a subsidiary of AT&T, the largest cable system operator, buying a major stake in such a significant competitor.
Liberty President Dobb Bennett did not directly address the DirecTV deal, but did acknowledge the "regulatory overhang." Said Bennett, "As you know, we currently fall under-as a subsidiary-the current AT&T umbrella with respect to FCC and antitrust matters. That occasionally has caused us not to pursue opportunities we might have otherwise." Federal crossownership limits mean that Liberty, for example, probably couldn't own TV stations in markets where AT&T Broadband owns cable systems.
The move will also probably permit AT&T to continue to own the 26% interest in Time Warner Entertainment it picks up as part of this year's takeover of MediaOne Group. Liberty controls a 7% stake directly in TWE parent Time Warner Inc., and anxious regulators told AT&T to dispose of one or the other.
One risk from the spinoff, however, that is drawing scrutiny by the Securities and Exchange Commission is whether Liberty should be considered an investment company. Liberty is often described as a mutual fund of media because so many of its assets are passive.
Liberty executives hate being compared to a mutual fund because of the implications it should be regulated under the U.S. Investment Company Act of 1940. That would mean no board seats on companies in which it invests; limited shuffling of assets among companies in its portfolio; and, perhaps most important to Malone, no class of super-voting stock that gives him total control of Liberty while owning just a minority equity stake.
Those would be dramatic restrictions on Malone and the company. "When Liberty is a subsidiary of AT&T, AT&T is the issuer of the common stock, and there is less risk of scrutiny," said Bear Stearns & Co. media analyst Ray Katz. "When Liberty is spun off as a common stock, someone may be likely to take another look." He does not believe that Liberty is at risk, however, because a number of Liberty assets that seem passive are considered active under the Act.