Found an indepth explanation of this stock deal in today's New York Times, and why Associated Group didn't go for the premium that everyone assumed this company deserved ....
Can you say 800 million dollars capital gains break?
The financial wheeling-dealings going on in this takeover require a finance degree (advanced) to understand (at least for me) .... but it is an interesting story of John Malone, CEO of TCI, at work ....
biff
p.s. Am still not sure of the tax break Associated insiders are going to get and if it translates into dollars for its individual investors ...
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New York Times
June 2, 1999
Liberty Media Agrees to Acquire Associated Group
By SETH SCHIESEL
Liberty Media Group, the television programming operation controlled by John C. Malone, expanded into the wireless communications business Tuesday by agreeing to acquire Associated Group Inc. in a deal worth perhaps $2.8 billion in stock.
Associated, based in Pittsburgh, is the largest investor in Teligent Inc., which provides telephone and data communications services to companies using advanced wireless technology. Associated owns about 41 percent of Teligent, which is run by Alex J. Mandl, a former president and chief operating officer of the AT&T Corporation.
Associated also owns Trueposition Inc., a small company that is developing technology to allow wireless telephone companies to locate callers, part of a Mexican cellular carrier and a handful of radio stations.
Liberty used to be part of Tele-Communications Inc., one of the nation's biggest cable-television companies. Since AT&T completed its acquisition of TCI earlier this year, Liberty has traded as an AT&T tracking stock. But AT&T has no stake in Liberty, which remains under the control of Malone, TCI's former chairman.
Malone is known for his financial wizardry, and the Associated deal is typically Malonian in its financial complexity, not least because Associated already owned big parts of both Liberty and AT&T.
At the same time, the Berkman family, which essentially controls Associated, is trying to use the deal to minimize the substantial tax bill the company could face were it to simply sell its assets piecemeal.
Twenty years ago, Associated sold a cable-television system in the Ohio Valley region of Pennsylvania to TCI for about $6.5 million in TCI stock. That stake is now worth about $2 billion in Liberty and AT&T stock. TCI's shareholders received both Liberty and AT&T shares in the AT&T-TCI merger.
Because of the phenomenal rise in the value of Associated's stake in TCI, a simple sale of those shares would generate capital gains taxes of as much as $800 million.
Malone, who is now one of the biggest holders of AT&T stock and sits on AT&T's board, stepped up to help Associated with its problem and won the cooperation of AT&T.
Malone could use AT&T's help because he did not appear to particularly want to invest in AT&T. The entire idea behind the Liberty tracking stock is to allow investors to invest in a company distinct from the core AT&T. But were Liberty to acquire Associated outright, that would entail issuing additional Liberty shares to buy a company that included about 19.7 million shares of AT&T, worth about $1.1 billion.
So AT&T agreed to put up exactly as many shares as Associated already owned -- 19,719,274 -- while Liberty contributed about 25.9 million shares of its own stock. For AT&T, the deal was a wash because it intends to retire the 19.7 million shares it will get from Liberty; the total number of AT&T's outstanding shares will stay the same.
But even Liberty's 25.9-million- share contribution was not a straight stock-for-assets swap. In addition to its AT&T shares, Associated already owned about 14.4 million shares of Liberty.
So, based on Liberty's closing price Friday of $66.4375, the value of stock that Associated's shareholders are set to receive in excess of what their company already owned in AT&T and Liberty is only about $770 million. Liberty has also agreed to assume up to $187 million in Associated debt, so the Teligent stake, Trueposition and Associated's other investments garnered only about $957 million.
That is a bargain for Liberty and Malone. Based on Teligent's closing price on Friday of $49.125, Associated's 41 percent stake in Teligent alone was worth $1.05 billion.
But Malone got the bargain because he helped the Berkmans achieve their main goal of reducing the potential $800 million tax bill while getting a good price for their assets. That process was made relatively painless for Associated because AT&T and Liberty may retire the Associated-owned shares, to which large capital gains apply, without paying any capital gains taxes. If an unrelated company, say MCI Worldcom, were to acquire Associated and then sell the AT&T and Liberty shares, MCI Worldcom would have to pay the taxes.
The implied value of the avoided taxes was seen yesterday in the rise of Teligent's shares, which rose $5.4375, to $54.5625, in Nasdaq trading.
"Having Liberty as an important investor brings a partner to the table who will add to the idea flow, add to the opportunities," Mandl said yesterday. "It will give us a chance to move Teligent even faster and further than we have before."
Executives close to the deal said that Malone could give Teligent more financial flexibility than it had enjoyed with Associated. The Berkmans, led by Myles P. Berkman, Associated's chairman, had appeared wary of diluting their stake in Teligent through acquisitions. Malone, by contrast, had never been shy in the merger arena.
Associated was advised in the transaction by Salomon Smith Barney. Liberty did not appear to use an outside finanical adviser.
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