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Buffett, Malone: Not-so odd investment pair

Investing can make for strange bedfellows.
/ Source: Reuters

Investing can make for strange bedfellows.

On Tuesday Warren Buffett's Berkshire Hathaway reported taking a 1.48 percent 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 percent 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 percent 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 favorite 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 Inc and Viacom.

Given the size of the Berkshire investment, worth about $147 million 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 $200 million 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.


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 Corp recorded a tax benefit of $16 million despite having pre-tax income of $621 million. In 2010 it had a tax benefit of $379 million even though it had pre-tax income of $1.56 billion.

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 percent this year and 43 percent from the low they made early in the fourth quarter.

Berkshire increased its position in DirecTV nearly five-fold in the quarter, making it a top-10 investor with 2.9 percent. Malone, former chairman of DirecTV, also holds a top-10 stake, with 3.8 percent.

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.