LIBERTY'S INDEPENDENCE MAY BE IN JEOPARDY
When Liberty Media Group splits from AT&T Fri., it will come under either heavier federal regulation or little regulation at all. Contradiction lies in Liberty’s unique structure and shifting FCC regulatory scheme, industry officials said, and situation has analysts scratching their heads.
Sign up for a free preview to unlock the rest of this article
Timely, relevant coverage of court proceedings and agency rulings involving tariffs, classification, valuation, origin and antidumping and countervailing duties. Each day, Trade Law Daily subscribers receive a daily headline email, in-depth PDF edition and access to all relevant documents via our trade law source document library and website.
Analyst Tom Wolzien and his colleagues at Sanford C. Bernstein & Co. raise possibility that, come Fri., Liberty will be in violation of SEC’s Investment Act of 1940. Act stipulates that business qualifies as investment company only if 55-60% threshold of assets aren’t controlled or operated by company. Liberty filed for SEC approval under Securities Act of 1933, contending it was operating company, not investment company. In report to investors, Wolzien said Liberty had controlling interest in too many assets. Although his team continued to rate Liberty as stock that would “outperform,” it said “Liberty does not appear to be in compliance now.”
Liberty spokeswoman downplayed controversy, saying company wasn’t investment company and was in compliance: “At this point in time, it’s not a concern for us, and we don’t foresee it being a problem in the future.” She didn’t offer specifics on how business structure qualified Liberty as operating company. Company has long kept particulars confidential. SEC spokesman declined to comment on specifics of case.
If forced to register under 1940 Act, Liberty would face “extensive restrictions on operating methods, management and capital structure, rendering the company unable to operate its business as it had in the past,” Wolzien report said.
On other hand, analyst Scott Cleland of Precursor Group said Liberty Chmn. John Malone was making “brilliant” move that would allow company to operate without onus of certain program access and tax regulations. Cleland said that by separating from AT&T, Liberty divested itself of cable assets, thus making it content company, not cable company. That would mean Liberty could sell content at market price, rather than at regulated taxable price applicable to cable companies, he said: “Malone bet ‘content was king’ and systematically transferred his wealth from his cable business to his content holdings.” Cleland said Malone was escaping regulated business to unregulated entity “with AT&T footing the bill.”
As of May 15, Liberty’s assets included 4% of AOL Time Warner, 50% of Court TV, 49% of Discovery, 10% of E! Entertainment TV, 25% of Bravo’s parent, 50% of Jupiter Programming, 67% of MacNeil/Lehrer Productions, 18% of News Corp., 43% of QVC, 100% of Starz Encore Group, 21% of USA Networks and stakes in many foreign properties and other entities. Currently, Liberty is tracking stock of AT&T, largest U.S. cable operator. Malone has sought to separate Liberty to gain more freedom to buy and sell properties.
If Liberty violates 1940 Act, it would be subject to fines and its contracts could be declared void by courts. However, it could apply for exemption and then would have year to come into compliance. Wolzien said options included divesting some assets in which it had largest voting rights.
Analyst Blair Levin of Legg Mason said Malone wasn’t risking much, however, because regulatory scheme was shifting. Appeals court in March struck down FCC’s 30% horizontal and 40% vertical ownership caps for MSOs (CD March 5 p1). “It’s not as much of a regulatory issue as it used to be,” Levin said, because of court ruling and other challenges that restricted integration of content and conduit. Liberty quarterly earnings are due out Tues.