Malone

"Risley and Malone were similar in another way. “Malone had known something about himself all along, that he was a dealmaker, a strategist, a fund manager—anything but an operator,” notes Mark Robichaux in Cable Cowboy. It’s a line that also perfectly describes Risley."

"I asked Paddick about Malone’s entrance to the company at the end of our first interview. “That was 2013,” he said. “Malone was only in for two years. But quite a two years.” Having already kept Paddick on our video call for an hour and a half, I suggested we could cover Malone’s involvement in a second interview. “The Malone story is pretty simple,” he replied, suggesting it didn’t have to wait. “He put in $ 185 million [USD] in January 2013 and got $ 1.1 billion in November 2015. Not a bad [thirty]-something months.”"

"Cable & Wireless’s offer of US $ 3.1 billion was $ 1 billion above Digicel’s—thus easily ruling Digicel out—and $ 175 million richer than Liberty Global’s offer. Cable & Wireless’s proposal was enticing—a premium of 12.5 times forecasted EBITDA for the next year. Risley wanted to accept but Paddick felt he could milk a few more drops from Cable & Wireless’s new CEO. He called Bentley on a Saturday and though he didn’t name the second-place bidder, offered enough clues to identify it as Liberty Global. Bentley would have expected Paddick and Risley to choose Liberty Global if it came down to a close contest, given that Malone was a Columbus shareholder. So Paddick told Bentley he had to sweeten Cable & Wireless’s offer. It was a bold play: Paddick claimed he needed space between Cable & Wireless and Liberty Global even though Cable & Wireless was already the highest bidder—by nearly $ 200 million."

""There is a big difference between creating wealth and reporting income," Malone liked to say, and the investors who held a long view rather than focusing on quarterly earnings would be rewarded handsomely."

"TCI doubled as an investment vehicle, investing in an ever-expanding portfolio of cable channels. Malone viewed himself as an investor and shareholder in each of these enterprises. It"

"In a cable television system, the largest category of cost (40 percent of total operating expenses) is the fees paid to programmers (HBO, MTV, ESPN, etc.). Larger cable operators are able to negotiate lower programming costs per subscriber, and the more subscribers a cable company has, the lower its programming cost (and the higher its cash flow) per subscriber. These discounts continue to grow with size, providing powerful scale advantages for the largest players. Thus, the largest player with the lowest programming costs would have a sustainable advantage in making new acquisitions versus smaller players—they would be able to pay more for a cable company and still earn the same or better returns, thereby creating a virtuous cycle of scale that went something like this: if you buy more systems, you lower your programming costs and increase your cash flow, which allows more financial leverage, which can then be used to buy more systems, which further improves your programming costs, and so on ad infinitum. The logic and power of this feedback loop now seems obvious, but no one else at the time pursued scale remotely as aggressively as Malone and TCI."

"His two academic fields, engineering and operations, were highly quantitative and shared a focus on optimization, on minimizing “noise” and maximizing “output.” Indeed, Malone’s entire future career can be thought of as an extended exercise in hyperefficient value engineering, in maximizing output in the form of shareholder value and minimizing noise from other sources, including taxes, overhead, and regulations."

"Malone, the engineer and optimizer, realized early on that the key to creating value in the cable television business was to maximize both financial leverage and leverage with suppliers, particularly programmers, and that the key to both kinds of leverage was size."

"As a result of this tax shield, he was comfortable selling systems if prices were attractive, to raise capital to fund future growth. As Malone told David Wargo as early as 1981, “It makes sense to maybe sell off some of our systems . . . at 10 times cash flow to buy back our stock at 7 times.”9"

"An exchange with Dave Wargo in the early 1980s was typical of Malone’s opportunistic philosophy regarding buybacks: “We are evaluating all alternatives in order to buy our equity at current prices to arbitrage the differential between its current multiple and the private market value.”13 These buybacks provided a useful benchmark in evaluating other capital allocation options, including acquisitions. As Malone said to Wargo in 1981, “With our stock in the low twenties . . . purchasing it looks more attractive than buying private systems.”"

"Malone was a pioneer in the use of spin-offs and tracking stocks, which he believed accomplished two important objectives: (1) increased transparency, allowing investors to value parts of the company that had previously been obscured by TCI’s byzantine structure, and (2) increased separation between TCI’s core cable business and other related interests (particularly programming) that might attract regulatory scrutiny."

"In pursuing these new initiatives, Malone was allocating the firm’s capital and his own time to projects that he believed leveraged the company’s dominant market position and offered compelling potential returns."

"Malone targeted a ratio of five times debt to EBITDA and maintained it throughout most of the 1980s and 1990s. Scale allowed TCI to minimize its cost of debt, and Malone, having survived the harrowing experience of the mid-1970s, structured his debt with great care to lower costs and avoid cross-collateralization so that if one system defaulted on its debt, it would not affect the credit of the entire company."

"Malone pioneered the active use of debt in the cable industry. He believed financial leverage had two important attributes: it magnified financial returns, and it helped shelter TCI’s cash flow from taxes through the deductibility of interest payments."

"As Malone sought to achieve scale by growing his subscriber base, three primary sources of capital were available to him in addition to TCI’s robust operating cash flow: debt, equity, and asset sales."

"In fact, Malone’s one extravagance in terms of corporate staff was in-house tax experts. The internal tax team met monthly to determine optimal tax strategies, with meetings chaired by Malone himself."

"His management of TCI had a quality of asceticism about it. Every element of the company’s strategy—from the pursuit of scale to tax minimization to the active use of financial leverage—was designed to optimize shareholder returns. As Malone said in summing up his analytically driven approach to building TCI, “They haven’t repealed the laws of arithmetic . . . yet anyway.” A fact for which his shareholders are eternally grateful."

"Brian broke the silence: “We know this is going to make you very angry. But we’re going to stop the CBS merger. We came here to personally tell you that we’re going to buy all of QVC at a twenty-five percent premium to today’s stock price.” Wowser. All I could think to say was “You can’t do that. You gave your word. And besides, we have the two-out-of-three rule, and Malone and I have agreed to proceed.” They coolly said that, nevertheless, they had a separate right to make any offer they wanted for QVC, and the shareholders could decide to buy into this merger or just sell out now for a high price. They handed me a formal letter with the proposal, repeatedly saying they were “really sorry.” Not sorry enough to have held off making the letter public. They had released a copy of it five minutes before my plane landed. I don’t believe they did it maliciously—they needed to put CBS on notice before they formally voted on the merger."