Paul Hodgson: The governance factors in Liberty’s takeover of Virgin Media

Virgin Media is about to be taken over by that part of the John Malone Empire that is Liberty Global in a cash and stock deal worth $23.3bn. It’s a move that does not bode well for the future governance quality of the combined firms, even though what results might be typical for a US media company, given that:

• Both CBS and Viacom are controlled by the Redstone family—including shares held by chairman Sumner Redstone — which has almost 80 per cent of each company’s total voting power.
• Clear Channel Outdoor Holdings is controlled by Clear Channel Holdings which in turn is controlled by three individuals: Mark P. Mays, Randall T. Mays and Blair Hendrix.
• CC Media is controlled by Bain Capital and Thomas H. Lee Partners.
• Charter Communications is controlled by just three large investment funds.
• At Comcast, the Roberts family owns more than 33 per cent of the outstanding stock and all of the Class B stock which has most of the voting power.

And that’s just the companies beginning with C.
What is it about media companies that seems to inspire this public-shareholder-keep-your-nose-out ownership structure? It’s a structure that might be suitable, even appropriate, for a privately held company. But it’s wholly inappropriate for a publicly held company that has floated itself to gain access to public funds, and then hasn’t ceded any kind of influence at all.

Sometimes it seems as if Walt Disney and Time Warner are the only media companies that are truly publicly held. And, ironically, those are the two companies that activist shareholders and proxy advisory groups are continuously hassling to improve their governance.The list of shareholder proposals, and “no” vote recommendations from the proxy advisors ISS and Glass Lewis, are pretty much endless for both Disney and Time Warner. This year at Disney, for example, major shareholder Hermes proposed proxy access – the right of shareholders to nominate a director on the company’s proxy statement – and public shareholder fund Connecticut Retirement sought a separation of the chairman and CEO roles. And Time Warner has been bugged by gadfly shareholder extraordinaire Kenneth Steiner among others, sometimes to magnificent effect, for years.
Now, they may not be perfect, but the governance standards at Disney and Time Warner are ‘Champions League’ compared to most other media companies, where it’s more like amateur soccer.
So, most US media companies have bad governance, but John Malone’s group of, somewhat ironically named, Liberty companies is something else again. Firstly there’s Liberty Media, Liberty Global, Liberty Interactive and Liberty Starz. At basically all of these companies, ownership is dominated by co-founder, sometimes chairman, and sometimes former CEO, John C. Malone. Mr. Malone, through multiple classes of stock which give ten votes per share to the shares he owns, and only one to the shares owned by the public. Thus he controls more than 33 per cent of each of these companies’ total voting power. Then there’s internet radio company Sirius. Liberty Media Corporation owns 100 per cent of the company’s voting stock. And Liberty Media’s CEO Gregory B. Maffei and John Malone both sit on Sirius’ board. At Expedia, chairman Barry Diller and Liberty Interactive Corporation control approximately 64 per cent of the company’s total voting power through another multiple class stock structure. At Discovery Communications, Malone controls almost 22 per cent of the company’s total voting power, and sits on the board.

In fact Malone sits on nine company boards in the Russell 3000, all of them with complicated ownership structures that favor dominant shareholders over public shareholders, and the boards are made up of aged, entrenched, tenured directors. As can be seen from the chart provided by GMI Ratings’ Global Leaderboard, Malone’s interlocking connections look like a drawing by an enraged, manic four year old with a malfunctioning Spiro Graph.

And Liberty Global’s board? Eleven directors, two insiders (including chairman John Malone), and some not very independent “independent” directors. Many of the other directors sit on most, if not all, of the other Liberty boards and in some cases that of Discovery Communications as well, or other controlled media companies such as Shaw Communications. Many of them are also either very young, for board members, or very old.
So that’s Liberty Media. What about Virgin? Virgin has what initially looks like two major shareholders (and neither of them is figurehead Richard Branson who only retained about 3 per cent of the company) but is, in fact, only one, Capital Group. Through two of its sub-funds, it owns around 26 per cent of the company. The next two largest investors are BlackRock and Goldman Sachs, each with around 6 per cent. Given its commitment to good governance I can’t see BlackRock voting for this deal, but what’s 6 per cent going to do?
Then again, at least shareholders at Virgin do get a chance to vote.

And they also have other opportunities. In early February, Jeff Grimsley, a Virgin shareholder, filed a suit with the New York State Supreme Court. Grimsley is suing Virgin Media’s CEO and the board for failing in their fiduciary duty by accepting Liberty Global’s offer without adequately considering other offers.
Virgin Media’s board structure resembles a typical UK company board, though not a particularly good one, with 12 directors, three of whom are executives, including the CEO, and a not very independent chairman. Among the so-called independent directors are two who have special relationships with the company.William Huff was a former chairman of the company, while Andrew Cole is an executive officer of Asurion, an insurance company which has its insurance products bundled with all Virgin’s mobile handset contracts. Therefore only half the board is made up of independent directors, a very low proportion in the US under normal non-media circumstances. Worse still, Virgin’s current chairman is a director on Sirius XM’s board where he joins Liberty Media’s CEO Greg Maffei, and John Malone. That’s a coincidence that you can be sure will be brought to the attention of the judge in the court filings for Mr. Grimsley’s lawsuit.

So, in terms of independence there doesn’t appear to be a great deal of difference between Virgin Media and Liberty Global. The real difference is in voting power. Once the merger goes through, Virgin Media shareholders, saying goodbye to 100 per cent, will have 26 per cent of the voting power of the combined company. We know who will have most of the rest.
The merger also contemplates re-domiciling (their word not mine) the whole company to the UK through yet another holding company. That might improve the lot of shareholders if it takes place, since dual class shares with different voting rights are virtually unknown in UK public companies. Though, given Malone’s penchant for retaining control and the excess complication of the ownership structures at every company where he has influence, I have little faith that the company, UK-based or not, will give shareholders the rights they deserve in exchange for their investment.
If governance at John Malone’s companies is so bad, why do shareholders invest in them? They do so largely because they are indexed and if you run an indexed fund you have to own those stocks. In addition, it has to be admitted, measured by stock price on its own, those shareholders at the moment are doing very well out of their, albeit powerless, investments. If you compare the share price performance of Virgin Media to the companies in the Malone Empire, you see that they’ve basically been tracking each other’s growth for the last five years. That would seem to suggest that it’s the sector rather than any style of management, or, for that
matter, ownership, that is driving performance.
But the real question is whether those shareholders would be doing better or worse if the companies were being run like public companies rather than as a media empire.
We may be about to find out.
The key conclusion here is that bad governance takes time for its demerits to mature. In the short term, performance is often unaffected, but in the long term the effects can be catastrophic. It took years for the problems at cable company Adelphia Communications to destroy the company. It was the same with lender Countrywide Financial.It was the same with telecommunications company WorldCom.
The combined company’s future value will be the test of the governance effect on performance. The trouble is, since the company’s chief rival in the UK is Rupert Murdoch’s News Corp, it’s going to be difficult to find a real, publicly-owned, publicly-controlled company to compare it against. I mean, we can’t exactly use the BBC as a comparator….

Paul Hodgson is an independent governance analyst.