Malone wolf

JOHN MALONE is revered as a genius by investors and executives in the telecoms and cable businesses. The boss of Liberty, a cable and media conglomerate, he has struck more deals than perhaps any other tycoon in the world—buying and selling hundreds of firms worth over $100 billion since the 1970s, often negotiating on his own, using calculations that fit on a napkin. Unusually for an empire-builder he has made his investors a ton of money, and has little interest in the public eye.

On May 26th Mr Malone, pictured, made his biggest bet yet. A cable TV and broadband firm he backs, Charter Communications, will buy two rivals, Time Warner Cable (TWC), and Bright House, to create a giant worth $130 billion, including debt. The takeover is the sixth-largest in American history. It will make Mr Malone the world’s pre-eminent media baron. Including his radio and foreign operations he will control businesses with triple the operating profits of Rupert Murdoch’s empire. Although Comcast, run by another media titan, Brian Roberts, will still be the biggest cable operator in America—with 27m subscribers to Charter’s 24m after the deals go through—worldwide Mr Malone’s empire will have over 75m subscribers.

By size, the deal is a landmark. But it is also an augury of the future of the internet, mobile and media. One of the cleverest men in American business has made a giant, expensive bet on an industry whose future is opaque because of murky regulation and fast-changing technology. So, what does Mr Malone see?

One possibility can be ruled out—that at the age of 74 he has gone soft and is making a trophy acquisition. Ever since he left McKinsey, a consulting firm, in 1970, to join the cable industry, he has been single-minded about making money. Between 1973 and 1999 he built up a firm called TCI by buying rural cable-TV operators, consolidating a fragmented industry from a scruffy office in Denver with plastic-laminate floors. Shedding not a tear, Mr Malone sold TCI in 1999 to AT&T for $59 billion (AT&T later sold it on). His approach has had four elements: complex ownership structures, high debt levels, assiduous tax planning and a refusal to overpay.

The latest transaction reflects all of those characteristics—except the last. Through several corporate layers Mr Malone will control 19% of the new firm’s shares and up to 25% of its voting rights. The new firm will be structured so that it should pay no tax for several years, at least. It will have a staggering $66 billion of debt, initially loaned by banks. Patrick Drahi, a French cable tycoon who runs a firm called Altice (and models his career on Mr Malone’s), was also keen on buying TWC. He amassed much financial firepower, but would have struggled to outgun his hero.

What makes the deal unusual for Mr Malone is its stretched valuation. At 9.1 times gross operating profits he is paying at least a fifth more for TWC than he typically does. He is offering 23% more for it than Comcast did in its bid last year, which was scuppered by antitrust regulators. Based on last year’s cash-flow figures the deal will make a pitiful 5.6% return on capital, assuming no tax is paid. Like most cable firms TWC has a stagnant top line, with growing broadband sales being offset by declining TV and telephony revenues. So fast growth will not bail out Mr Malone.

How might he justify this price? The most obvious explanation is that Mr Malone thinks the world has not changed much since the 1990s and that the cable industry remains a collection of local monopolies from which ever more juicy profits can be squeezed. America’s cable firms have poor service and high prices: the average Charter customer pays at least 50% more per month than one of Mr Malone’s customers in Britain or the Netherlands. In Europe cable firms face tough competition in broadband from telecoms operators; in America the telecoms firms have rolled out fixed-line broadband to perhaps just half of homes or fewer.

So, Mr Malone’s master plan may simply be to squeeze both customers and suppliers. By being big the new firm can command better terms from television networks: programming represents about 40% of its costs. The main reason regulators stopped Comcast from absorbing TWC was their worry that such a cable colossus would bully online-video providers such as Netflix. Comcast-TWC would have had over 50% of America’s broadband market. Mr Malone’s proposed combination would have a market share of less than 30%. As a result it may be waved through by weary federal regulators.

Yet there is a second possible motivation for Mr Malone’s deal. Perhaps he recognises that the comfy rules that have governed the cable industry are withering. Customers no longer want to pay cable operators for bundles of TV channels they mostly do not watch, and are shifting to watching video via the internet. Programme-makers are happy to abet them by selling their shows through the web. They are also scaling up, anticipating a consolidation among the cable firms and other distributors they sell to. This is why Mr Murdoch tried (unsuccessfully) last year to buy Time Warner, the former parent of TWC, which makes films and TV shows.

Telecoms firms are elbowing into the TV industry: AT&T is buying DirecTV, a satellite-TV operator; Verizon is moving into internet video. Meanwhile, Google is laying high-speed broadband fibre in some cities. None of this poses an immediate threat to cable. But a once-in-a-generation shift may be commencing. America may eventually end up with a few big, competing giants that offer consumers a range of broadband, video and telephony services, through a combination of fixed-wire and mobile technology. This new world would be less dependent on flogging costly bundles of channels to reluctant punters. And of most interest to Mr Malone, it would be more efficient and profitable, since customers would be buying a range of services from the same firm, and perhaps be more loyal.

Such a shift is happening in Europe—led among others by Mr Malone’s European cable unit, Liberty Global. In April it bought a Belgian mobile operator, claiming the cost savings would almost double its target’s operating profits. On May 19th Mr Malone said that there was a “great fit” between Liberty Global and Vodafone, which owns mobile networks across the continent. Mr Drahi’s firm is taking part too: it recently bought two French mobile operators and Portugal’s main telecoms firm, again with a view to boosting margins through cost savings.

Mr Malone’s deals ensure that he will remain a powerful figure in the internet business. Perhaps he envisions a European future for America, with his cable giant eventually buying a mobile network. Unlikely? No more so than a 32-year-old with a doctorate in operations research taking over a near-bankrupt cable-TV firm in 1973 and turning it into an empire.