Breakingviews: John Malone M&A cleanup costs minority investors

If you sup’ with the devil, you should have a long spoon. Investors in Liberty Broadband have re-learned the old adage, after it struck a roughly $13 billion sale to cable company Charter Communications on Wednesday. Both are outposts of the empire of John Malone, the “cable cowboy” famed for byzantine dealmaking. The agreement squeezes investors out of a tight spot – but charges for the privilege.

Liberty is less a company than a rounding error in that empire. It owns 45.6 million shares of Charter, about a quarter of the $57 billion cable provider, where it appoints three directors. That’s a bonus for Malone, who has 48% voting control, reaching a majority when his lieutenants are added.

The other asset Liberty holds is Alaskan cable operator GCI. Thing is, the market ascribes it no value. The day talks between the two sides were disclosed in September, trading prices of Liberty’s various stock classes valued the enterprise at about $12.5 billion, yet its Charter shares alone were worth $15.1 billion.

By merging, Malone can close that gap and simplify Charter’s governance. The yawning 17% discount is also his opportunity. If Charter captures the missing value itself, it can buy its own shares cheap.

That is what has happened. The deal is entirely in stock: Liberty shareholders receive 0.236 Charter shares each. In September, Liberty said it had suggested an exchange ratio of 0.29 shares. That would have been roughly fair and gained some value for GCI. The agreed offer, though, based on Charter’s closing price on Tuesday, and adding in about $2.5 billion in net debt assumed by the buyer, is worth 11%, or roughly $2 billion, less than the stock locked up at Liberty.

In a twist, GCI will be spun off to shareholders. Assume it trades at Charter’s 6.6 times multiple of its estimated $369 million in 2025 EBITDA, according to Visible Alpha estimates. Sub out $1.1 billion of remaining debt, and that’s worth an extra $1.4 billion.

It might be enough to secure the required minority shareholder approval. After all, Liberty stock may have traded so cheaply on expectations of an outcome like this. The alternative of voting down the deal may be a return to where the stock was trading in early September, or about a third below the accepted offer. Investors might take what they can get, and let the devil take his due.