Malone Courting Allies in Cable Wars

Leave it to John Custer Malone to charge even harder as the enemy masses.

With Viacom Chairman Sumner Redstone challenging his growing communications industry hegemony in court, Malone’s mood seems to be ever more expansionary.

On Wednesday came word that he plans to fold his Liberty Media into Tele-Communications Inc. The deal will strengthen Barry Diller’s $9.5-billion bid for Paramount Communications, which is backed by Liberty. Sources say Malone is also exploring other alliances.

The restless cable mogul has had exploratory talks with at least three of Paramount’s competitors--MCA Inc., Sony and Fox Inc.--according to several high-level sources. Colleagues say that the discussions could go forward, even if Diller succeeds in acquiring Paramount, because of Malone’s insatiable need for programming to fill his cable channels.

Malone’s arm’s-length discussions have reportedly centered on the possibility of acquiring a 50% interest in MCA, Sony Pictures or 20th Century Fox. Sources at Sony and Fox confirm the discussions, which date back as much as a year, while MCA declined to comment.

“It’s too early to say what’s going to happen,” said one source close to the talks. “But you can’t dismiss this. Malone is willing to take half of almost anything.”

Whether anyone is willing to sell a piece of their company is questionable. While the Paramount bidding war points to the high premium on movie studios, there’s no evidence that Sony, MCA and Fox are looking to cash in. One theory is that the discussions have taken place only because none of the studios dares to turn a deaf ear to someone as powerful as Malone.

On the other hand, a partner like Malone could make strategic sense for a major studio.

Japanese powerhouses Matsushita Electric Industrial Co., which paid $6.6 billion for MCA, and Sony Corp., which bought Columbia Pictures for $3.4 billion, have both been hard hit by the worldwide downturn in electronics sales. A Malone deal would allow them to pay down studio acquisition debt and play up the increasing value of their entertainment holdings.

Fox Inc. owner Rupert Murdoch, for his part, already has a global media empire. But, like the others, he would profit from being linked to Malone’s huge cable franchise.

On the telephone front, Malone is said to have turned his attention to several of the regional telephone giants after unsuccessful discussions with AT&T.; Some observers believe that pulling Liberty--designed as a holding company for the numerous minority stakes TCI held in 26 programming companies and 14 cable systems--back into TCI is a prelude to a deal involving a phone company.

A reconsolidated TCI-Liberty could be attractive to a phone company that wants to invest in a cable-programming company. Malone is said to be eager to establish an alliance with a phone company similar to the one forged between Time Warner and US West.

“Over the past year John has had conversations with everyone from AT&T; on down,” said one Wall Street investor.

Even if Malone does not want to partner with a phone company, there are now straightforward regulatory reasons for pulling Liberty Media back into TCI.

Only two weeks ago, the cable industry got a lift from the Federal Communications Commission when it issued new rules about vertical and horizontal integration in the cable industry.

Although the FCC set limits on how many households a cable company could serve and how many networks it could own, TCI nonetheless fell under those limits. Analysts said the new rules paved the way for putting Liberty back together with TCI, which was spun off 2 1/2 years ago.

“The FCC was relatively lenient about integration,” said Mark Reily, a principal in the media investment firm MCR Capital. “And it’s been cumbersome for TCI to have all these pockets out there.”

Malone appears undisturbed by the regulatory backlash such an action may cause among lawmakers in Washington, where TCI has frequently been a lightning rod for allegations of monopolistic practices in the cable industry.

Likewise for the antitrust suit filed by Redstone, who is competing against Diller for Paramount.

Indeed, while TCI lawyers and bankers supposedly were drafting the re-merger plans in New York, Malone was at a private conference in Bermuda pondering the high-technology future with other top cable executives.

If Tele-Communications Inc. succeeds in reacquiring Liberty Media Corp. through a tax-free stock swap, it will result in a powerful, vertically integrated company--and greater liquidity for Malone, who owns 50% of Liberty.

It’s an impressive play--and one that was reported by The Times in July as a possible scenario if the FCC set lenient limits on cable ownership.

Only the TCI shareholders who failed to follow Malone’s initial investment in Liberty are licking their wounds. Prior to the spinoff in 1991, Liberty’s assets had an indicated market value of roughly $500 million; today that value exceeds $3 billion.

Back in 1991, every TCI shareholder had the chance to swap 16 shares of the big cable TV operator for one share of Liberty.

But understandably, some investors were discouraged by the massive document they were mailed that outlined the deal. Forbes Magazine even advised readers to “pass on the swap.”

The rest, as they say, is history. Liberty’s shares have increased 15-fold in value, while TCI has risen 73%, according to Furman Selz’s analyst John Tinker. By his calculation, Malone’s stock and options in Liberty have a current market value of about $700 million, and TCI Chairman Robert Magness’ stake in Liberty is worth nearly $270 million.

Times staff writer Kathryn Harris contributed to this story.