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Boston - Investing can make for strange bedfellows.
On Tuesday Warren Buffett's Berkshire Hathaway reported
taking a 1.48% stake in John Malone's Liberty Media in the fourth quarter,
nearly enough to make Berkshire a top 10 shareholder. Berkshire also ramped up
its stake to nearly 3% in satellite broadcaster DirecTV , which Malone formerly
chaired and in which he remains a major holder.
Aside from their riches, savvy investing and simple
lifestyles, the two investors could not be more opposite: Buffett built a
diversified financial and industrial empire and has famously called the low
income tax rate he pays unfair. Malone built a media powerhouse through deals
structured to incur the least tax.
Though the pairing may look odd, investors say the two are
in many ways kindred.
Malone "is a guy who's super savvy", said Bill
Smead of Smead Asset Management, which has about 3% of its equity assets in
Berkshire shares.
"In the cable/new media world of the last 30 years,
he's been the Warren Buffett."
Liberty also has one of Buffett's very favourite virtues -
it is cheap, trading at 5.5 times cash flow, against a multiple of 7 or 8 times
for peers.
"There's a sizeable discount to the company's net asset
value and I think they're going to reduce that," said Collins Stewart
analyst Thomas Eagan.
He adds that Liberty appears less risky than its peers and
has plenty of opportunities to add value with asset sales or spin-offs. It owns
the Atlanta Braves baseball team and has significant interests in SiriusXM
radio, concert promoter Live Nation and the Barnes & Noble bookstore chain.
It also has minority investments in Time Warner and Viacom.
Given the size of the Berkshire investment, worth about
$147m at the current stock price, it is likely the bet was actually not made by
Buffett but rather by his relatively new lieutenant, Todd Combs. Combs, one of
two investment managers hired to help run Berkshire's portfolio, is thought to
be the architect of Berkshire's recent investments in the $200m or less range.
It also reflects the influence of Ted Weschler, the other
new Berkshire investment manager who just started this year. Weschler's last
holdings report at his former fund shows he owned 1.9 million shares of Liberty
Media.
'Darth Vader' the engineer
Combs, Weschler or Buffett, though, it is still an
unexpected pairing. While Buffett's homespun charm makes him popular with
Washington types, for example, Malone earned the nickname "Darth
Vader" from Al Gore when the former vice-president was still a senator,
according to the 2002 biography Cable Cowboy.
Malone, who holds a PhD from Johns Hopkins University, is
known as a brilliant financial mind who loathes government interference in
business. His deals are often complex and intricate, structured primarily with
a focus on paying as little tax as possible.
In 2009, for example, Liberty Media recorded a tax benefit
of $16m despite having pre-tax income of $621m. In 2010 it had a tax benefit of
$379m even though it had pre-tax income of $1.56bn.
Tracking stocks, spin-offs, reverse Morris Trust mergers and
other financial engineering moves are all hallmarks of Malone's dealmaking. He
follows a "trade up" business philosophy, whereby he trades equity
positions in one company for smaller stakes in larger companies.
Malone has used this strategy to develop partnerships with
nearly every major media company or mogul of note over the last 30 years.
For Buffett, it seems the investment has already paid off.
Liberty shares are up 12% this year and 43% from the low they made early in the
fourth quarter.
Berkshire increased its position in DirecTV nearly fivefold
in the quarter, making it a top 10 investor with 2.9%. Malone, former
chairperson of DirecTV, also holds a top 10 stake, with 3.8%.
There is no question, either, that the two men know each
other and have talked business before. In 2009, Malone told reporters on the
sidelines of the Allen & Co media conference in Idaho that he and Buffett
had privately discussed what was at that time one of the hottest media
properties around.
The notoriously technology-averse Buffett, Malone confided
to reporters, had told him he'd be willing to pay a subscription fee to use
YouTube.
