By moving to break up the QVC partnership, Liberty Media is catching Comcast at a rare moment of financial vulnerability. At the same time, Liberty CEO John Malone has a major dispute with Comcast over movie network Starz! that could get thrown into the mix.
Liberty has pulled a trigger in the QVC partnership agreement that starts a process very likely to change the ownership of the shopping network. While the companies could work out a new deal and remain partners, it's more likely that one will buy out the other or both will sell out to a third party.
With $4.4 billion in sales last year, QVC is not just the largest shopping network but the second-largest television network of any kind. By expertly hawking the likes of Lock & Lock 15-piece airtight food-storage systems and Bob Mackie silk dupioni embroidered jackets, QVC generates more revenue than CBS, ABC or Fox and comes close to the ad-sales revenue of NBC. And with $850 million in operating cash flow, QVC is more profitable than all the broadcast networks combined.
Liberty's move was no surprise. President Dobb Bennett publicly signaled in December that he would probably pull the trigger either this year or next, his last two chances to get some money out of Liberty's 42.6% stake in QVC. Selling would get Liberty lots of cash; buying would put QVC's stream of cash flow onto Liberty's income statement.
"We'd be very interested in buying them out," Liberty Executive Vice President Gary Howard told investors at Bear, Stearns & Co.'s annual media investor conference in Boca Raton, Fla., last week. Aside from the health of the business and QVC's fit with Liberty's own international cable-system operation, "it could be a platform for us to do other acquisitions."
Comcast executives love QVC, its rich cash flow and management team Doug Briggs and Bill Costello. What they don't necessarily love is the debt they'd have to take on buying Liberty out.
Comcast CEO Brian Roberts has pledged to investors, lenders and debt-ratings agencies that he will cut debt. Comcast's $58 billion takeover of AT&T Broadband ballooned the MSO's debt load to $29.5 billion.
Merrill Lynch media analyst Jessica Reif Cohen pegs QVC's value at $13 billion to $14 billion, so buying out Liberty would take around $5.5 billion in cash, stock or notes.
Comcast executives said that whether they're buyers or sellers depends on the price, but one message was clear: "Our investment grade rating is sacrosanct," declared Comcast CFO John Alchin at the Bear Stearns meeting.
But another Comcast executive said that "there's no way we don't win here. They can't force us to buy it; if we sell it, we improve our balance sheet. We could even find another partner to step in and pay for Liberty's end."
The trigger is a little bit like the common "buy/sell" clause in partnership agreements. The two sides have to appraise the network within 30 days. Comcast gets first shot at deciding whether it wants to buy Liberty out. If not, Liberty gets a month to decide whether it will buy Comcast out. If neither side wants to buy, then they agree to make their best efforts to sell 100%.
Liberty and Comcast have co-owned QVC since 1994, when Comcast torpedoed QVC CEO Barry Diller's deal to acquire CBS. Federal restrictions on ownership of broadcast stations and cable systems would have forced Comcast to shrink its ownership of a combined QVC/CBS to less than 5%. Roberts wasn't interested in converting a major stake in QVC into a tiny stake in CBS.
Malone, who already owned a major QVC stake, went along with the takeover, becoming a minority partner.
The Starz! dispute may come into play as the companies negotiate. Comcast is trying to break AT&T's old, hugely unfavorable affiliation deal with Liberty's Starz! and instead employ the more conventional terms in Comcast's deal. When AT&T bought Malone's Tele-Communications Inc., Malone pretty much suckered the company into a startlingly expensive Starz! contract. AT&T was not only obligated to a high monthly license fee but had to cover any substantial rise in the fees Starz! pays movie studios for 20 years.
Starz! had already sued AT&T to cough up, but Comcast has sued to break the deal.