Breakingviews: John Malone is a flawed ambassador for Discovery

If there is something that John Malone likes, it’s a complicated, tax-free deal. The U.S. media mogul has gotten his wish in the tie-up between media company Discovery and AT&T’s WarnerMedia TV and movie assets announced on Monday. If only the deal were equally appealing to Discovery’s regular shareholders.

The so-called cable cowboy will hand over his stake in Discovery, turning his supervoting shares into the normal kind, and is expected to get a seat on the board. Decades-long partner Advance/Newhouse, which together with Malone commands 44% of the Food Network operator’s votes, will give up certain rights too, like the ability to approve the chief executive and veto major deals. But it gets a premium paid in shares worth roughly $750 million for that.

Malone’s willingness to sacrifice influence looks like an advertisement for the financial attraction of the merger. But should he get a board seat, it would mean he’s still in line to benefit in a way other shareholders don’t. And there are still aspects of the deal that don’t favor regular investors. Advance has not only signed off to merge with WarnerMedia but has also agreed not to approve a deal with any other partners. With a stake so large – it is the biggest economic shareholder – it’s a big obstacle to a would-be rival bidder.

Moreover, Discovery has agreed to pay AT&T $720 million if the smaller company walks away. Even though AT&T has agreed to a break fee too, Discovery’s amounts to roughly 35% of the cash that it has on its balance sheet, making it pretty burdensome. And Discovery’s CEO David Zaslav is keeping his job, which means his interests, like those of Malone and Advance, aren’t aligned with those of most of his company’s investors. An activist investor might find plenty to complain about.

Malone was already not known to be an advocate for minority shareholders: in companies like Liberty Media he has also maintained his grip through tracking stocks and supervoting stakes. While his embrace of the AT&T deal goes some way to showing it’s the best option available to Discovery, the company still has more work to do if it really wants the deal to go without a hitch.

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