Interview Date: December 11, 2017
Interviewer: Stewart Schley
Aryeh Bourkoff describes how he began his distinguished career in the mid-1990 as an investment banker advising cable companies during a time of stricter regulation by the FCC. He discusses the importance of cash flow and the entrepreneurial nature of the industry. He speaks about the factors that have made him successful as well as mentioning the important figures in cable, including Monty Rifkin, Jerry Kent, Brian Roberts, and John Malone. He reiterates how investment partners can add value to the industry and lead to successful outcomes. Bourkoff explores the issues around vertical integration. He discusses the need for the industry to not abandon the video business, but improve the service while innovating new services at the same time. He explains the failure of AOL after the merger with Time Warner, and what went wrong. He comments on the importance of management acumen in the cable industry, and describes new technologies that could have been disruptive. He defines Netflix and how it’s different, as well as how they and the other large technology platforms–Amazon, Apple, Google, Facebook–dominate the global customer base. He also asserts that the cable industry should re-orient its video business to be a direct to consumer model. He describes how he started Lion Tree Advisors, and established the mission of the company as a “merchant bank,” focused on the media/technology/telecomm business. He concludes with his thoughts about net neutrality, and how its potential rollback would affect the industry and its consumers.
STEWART SCHLEY: Greetings, and welcome to the Cable Center’s Oral History series. I am Stewart Schley, it is December of 2017, and I am privileged to be in the presence of a dealmaker extraordinaire, whose imprint can be seen in many of the major defining transactions of late in and around the cable industry. Aryeh Bourkoff runs LionTree Advisors. We used to see his name a lot quoted in the press as an analyst and a deal-side guy for UBS. Suffice it to say he has been sort of at the center of the center over the years as M&A transactions have reshaped this industry. So, Aryeh, thanks for joining us today.
ARYEH BOURKOFF: Thank you very much for having me, and it’s an honor to be here in Denver at the Cable Center. I’ve been an admirer of the Cable Center for many years, my whole career, since its formation. Obviously, I know many of the inhabitants that are really in the spirit of the walls.
SCHLEY: Surrounding us.
BOURKOFF: Surrounding us. So, it’s a real honor for me to have made it to this seat, and I’m grateful for you to take the time to interview us.
SCHLEY: I wanted to know where your life began to intersect with cable television, how that came to be in the first place.
BOURKOFF: I go back to 1995, when I left the University of California and made it to New York, for the first time in my life. New York City. And I tried to get a job on Wall Street—because I figured, I didn’t really have any discernible or defining skills, so I had to find someone who would train me and pay me at the same time, which I thought was a good bargain for me. I didn’t really have anything to offer, and they were going to train me and also compensate me for it. And I thought Wall Street would be a great place to train, and I looked hard to find a job. Frankly, it took me three or four months to find a job. I did everything except for maybe put resumes in windshield wipers in Manhattan. I finally landed a position at Smith Barney with a gentleman named Alan Ginsberg—not the poet, B-E-R-G—and he ran the research group, the high yield bond research group at Smith Barney, the junk bond group. This is after Drexel had folded and people had been dispersed. He said, “If you don’t mind, I’m going to ask you, Aryeh, to support me in the research endeavors as the head of the group.” I said, “That sounds great. What do you focus on exactly?” He said, “I focus on cable, media, technology, food and restaurants.” I said, “I don’t know anything you just said, but I like to eat, so I’m game.” That’s how it started. I was very fortunate to fall into the industry from day one for my career.
SCHLEY: This was ’95-ish?
BOURKOFF: 1995, yes.
SCHLEY: And what was going on in the industry at the time, what were sort of the characteristics of cable?
BOURKOFF: It was a time of a somber moment actually in the industry because re-regulation had happened in 1994, when the FCC had put some caps on pricing. In fact, that’s really what was the ultimate killer of the Bell Atlantic-TCI merger, which never ended up coming to fruition because this regulation came in the middle of it. And so, what happened was the industry was trying to rebound again from that moment and if you recall, Microsoft ended up putting an investment into Comcast in 1997 that was the impetus for rebound of cable valuation. And Brian Roberts orchestrated that deal—I think he was only about 35 or 36 years old. And I was covering the Comcast bonds. They were BB rated bonds. I met Brian when he was a young man there (he still is a young man). That was the moment of kind of a resurgence at that point in time. There was also a technology that was emerging around that time called wireless cable, which was the codeword for the MMDS spectrum. Wireless cable, I thought, was an oxymoron.
SCHLEY: Cable without the cable.
BOURKOFF: Cable without the cable. But it was Bell Atlantic and NYNEX owned the CAI Wireless and Harlem Wireless and they were doing a bunch of deals we were involved with at Smith Barney. So, it was quite interesting to merge.
SCHLEY: When you first began to examine the industry, though, what characteristics did you find appealing, from an investment standpoint?
BOURKOFF: I loved looking at the cable industry from day one because I remember saying to my friends and ultimately my wife, it had everything. The cable industry has and has always had everything to really chew on. It has technology. It has capital structure, coupled with debt. It has entrepreneurial owners and operators. It has regulation to be considered. It has competition. And really it has innovation at every turn. In spite of that, there is always a wall of worry around the industry—it’s imminently going to crumble and come down. And therefore, you actually have to find a grounding force, which I always looked at as being cash flow, the value. But you really had a lot of volatility above everything else. It had everything.
SCHLEY: It’s sort of puzzling or ironic to me in that really it was one of the most stable and predictable generators of cash anywhere, right? It had that utility aspect to it.
SCHLEY: Is that fair?
BOURKOFF: Cable has always been very stable. Customers by and large pay their bills and at least the revenue line was easier to predict back then because it was a video, single product industry. And you look at the subscriber growth, and you look at how much they were going to pay for it per month, which we call the ARPU, and you can calculate the revenue stream. And I actually remember my first projection model, which was for Marcus Cable. And I did the projection model and then they reported a quarter, and I was right. I got very close. I said, “Well, I may be pretty good at this thing.”
SCHLEY: You can do this.
BOURKOFF: And I really felt gratified. I remember calling Jeff Marcus and Tom McMillan over there, and I said, “I got it close to where you were.” I was really proud of myself. Where it becomes more complicated is when you get into the capital expenditure cycle, because you have to constantly upgrade the networks, and when you get into innovating the revenue line beyond just one business. Broadband came into being and telephone came into being, and many other applications now are on the existing pipe. And then it became actually much more competitive over time. So it got more complex over time.
SCHLEY: Did you ever share that sentiment of impending doom for the industry, or were you kind of a bull on cable most of your analyst career?
BOURKOFF: I’ve been a perpetual optimist with respect to the industry. Mostly because of experience and seeing a cash flow stream that was rock solid, by and large. When you have a cash flow stream that is rock solid, you can do things with it. You can leverage it to create better returns. You can invest it into creating different services. And at the same time, the entrepreneurial nature of the industry was always front and center. So, you had this feeling of growth at all turns; that people were—they had almost ants in their pants. Nothing was going to be satisfying in the status quo. And so, things were always moving, which I always thought would be very appealing.
SCHLEY: I was going to allude to that because you mentioned it earlier: the entrepreneurial quality. As you traveled and analyzed the business, you started to meet people, I’m sure, some of the captains of industry…beyond that entrepreneurial spirit, were there shared characteristics or what was the vibe in the industry to you then?
BOURKOFF: I’m very fortunate because in the 20-plus years that I’ve been around the industry, I feel like the number one factor that I can attribute to my success, in my own way (in my own humble way, because I was in the middle of these deals or the middle of covering industries. I wasn’t really, until starting LionTree, an entrepreneur in my own right)—but the number one thing that I attribute the success to was learning and being around the entrepreneurs at every turn.
It is unique in this industry, among any industry, to see this kind of thought process in motion all the time around you. I remember actually a story when I was at Smith Barney, the first bond deal I ever worked on was a bond deal for a company called United International Holdings, Australia. The Australia division of what is now Liberty Global was called United International Holdings. I remember going up to the top floor and sitting in a meeting with my boss and meeting a CEO of that business named Mike Fries. And I just listened in awe at how he was describing the Australian cable business, and I think he was also in his early to mid-thirties at the time. And I walked back to my desk and I remember saying out loud, “This guy is going places.” I learned a lot in that meeting, and it was nothing of what I would have expected. And to this day we are great friends.
SCHLEY: Mike is now the CEO of Liberty Global and it’s a very successful international company.
SCHLEY: Just pepper the conversation with a couple of other names who really sort of stood out to you in that early introduction to the industry. Who were some of the stars?
BOURKOFF: Well, all of them were stars. My first transaction I ever worked on – even as a research analyst – where I had to go down and do due diligence, was in Gwinnett County, Georgia, with a guy named Monty Rifkin. Rifkin Cable Associates ended up getting subsumed, now part of Charter Communications. But then I worked with Jerry Kent when he was running Charter Communications, and then Suddenlink. I always found him to be a phenomenal operator and a great individual. Working with Brian Roberts, both as a research analyst when he was attempting to buy Disney and helping to understand where the stock was going to go and what the limitations of that deal were. And then as a banker, advising Brian and Comcast successfully during the NBC merger. And watching the second bite of the apple and talking to him about the investor reaction to that, and how to position his story appropriately, not just the fundamentals. And many, many more. There’s obviously Dr. John Malone, who I actually just left having lunch with earlier today here in Denver and has been a mentor of mine and a mentor to many, frankly. I’m not alone there. But I got to see him up close and personal in the resurgence of his interest in cable. Not only in the U.S., but when he’s been doing deals in Europe. And how he approaches that. These are great conversations.
But cable, cable content, cable channels—all across the board I find entrepreneurs that I’m lucky to be around every single day.
SCHLEY: If I’m correct, you made this sort of change in the progression from research side to a deal side. Can you just talk about how that happened?
BOURKOFF: I’ve always found in my career that if you have the ability to have a specialty, which I was lucky to jump into or fall into from day one in media and technology in cable and telecomm, then—stick with that specialty and learn about the fundamentals of business and about the people, and create more cumulative value over time. That was a great luxury: to keep with one industry. Because I had that, I felt very comfortable with taking risks in other parts of my career. So, I started off in the high-yield bond market, but then I went to equity research, covered the stocks of the industry, and still actually covered the bonds. And I think covering the whole capital structure I thought was a differentiator. Especially around 2002 when I started doing it and saying, “This is how the equity should trade. This is how the bonds should trade.” And then going to companies like Fidelity and Wellington and investors around the world and saying, “I’m not going to have two meetings. Let’s have the fixed income and the equity investors in the same room and let’s just really tackle the value of the company, and I may point out some disconnections between the two of you, but that will be helpful for all of us.” I remember having those kinds of conversations over time.
And then I felt like covering the stocks became very public in terms of having conversations with CEOs and then having to translate and give my views to investors about what—reports, ERISA reports, etc. And I felt like there was a great moment to go private. Around 2006-2007, UBS asked me if I would come over to the investment banking side and really advise or help to advise the CEOs of business privately. And that’s when I started to become a banker, or a dealmaker. But the way I approached it, I wanted it to be different than normal banking partially because they had been doing it for a lot longer than I had, and if I wanted to come in, I had to start with what I already knew.
BOURKOFF: And my first meeting was with Brian Roberts. I went down to Philadelphia. I remember thinking, if I went into Brian and said, “This asset’s for sale”—I think at the time it was the Weather Channel. “This is for sale. Do you want to buy it?” He would say, “Yes” or “No” and that would be the end of the meeting, and I would be judged as a normal investment banker. That wasn’t a wise strategy. So, I went in instead and said, “Brian, let me talk about what I know and what I think you really care about, which is your stock price. That is the value creation determinant of your business.” And every CEO, no matter how much they tell you they never look at their stock price, they look at their stock price. If I had a stock price tracking me I would look at it probably every second, even though I try to make decisions that are based on the long term. So, I said to Brian, “Your stock is here. We both know it should be much higher over here.” The way you get from point A to point B, I think, encompasses everything from the way you talk to your investors, to the assets you own, to your strategy, to your capital structure. And that created a much more holistic, fulsome conversation (privately) that set up a lot of different dynamics and ultimately led him to advising on the NBC merger. And I sort of approached it as a relationship, which I thought was logical, that over time, we’re together as partners in trying to get the best value investment banking. The banking advice should lead to better investments for you and the companies. And I was in service to the industry in that way.
SCHLEY: That led to some protection of differentiation of you as a financial advisor from, as you described, the broader spectrum of bankers.
I wanted to ask you about—that’s a good segue—vertical integration at large. I guess you have been a proponent in the right mix of enhancing asset value by playing across the fence, if you will. NBC—maybe the signature deal is Comcast/NBC, but can you talk about why that made sense, and why it made sense in a particular moment of time?
BOURKOFF: It’s a great question. Vertical integration has been a quandary to tackle for the industry for a long time. Because, in some cases, it makes sense, and in other cases, it does not. And ultimately, you have to be judging these transactions on the long-term value creation that comes to fruition over time. I always felt that it was much more important for a company to be independent and scaling in its core business of content distribution, distribution, than to be vertical per se. However, Comcast/NBC was an example of a vertical deal, and as an example, it has worked beautifully. I think the reason why that deal has worked so well is great management. NBC, under the auspices of Brian Roberts and Steve Burke in particular, has performed so much better than it was before. I’m not sure if it necessarily was due to any synergy between the distribution and content. In fact, the night before we announced the deal, Brian called me and said, “Look, Aryeh, you’ve been on the other side in the research community before now, and I have the benefit of having you on my side privately before we announce the deal. Can I ask you a question?” I said, “Of course.” And he said, “What’s the first question I am going to get tomorrow morning?” And I said, “OK, the first question you’re going to get tomorrow morning has nothing to do with this deal.”
SCHLEY: What was it going to be?
BOURKOFF: And he said, “What do you think it is?” And I said, “The first question will be from the investors, with some element of trepidation: “What does the NBC transaction mean for your love for the cable business?” And he said, “Well, I would say that we love the cable business and we’ve been in a lot of deals in cable, but for now on, we really think there’s more opportunity in content, and that’s why we’re doing this deal.” I said, “There’s a risk that your stock is going to go down based on that answer, because remember that every single investor on that call today or tomorrow are your cable investors. And you need to speak to them as cable investors, not NBC investors.”
BOURKOFF: And my answer would be, “If it’s true, nothing has changed. Your love for cable exists just the same today as it did yesterday. And lock that thesis. And then look at NBC opportunistically beyond that.”
SCHLEY: Is that the way it was for him?
BOURKOFF: And he got it. He marketed that deal truthfully, based on that thesis and in that way, which is: you lock your core and you grow from there. Then saying: we’re strategically complete, we’re not looking for anything else, which removes the overhang on “what else are you looking for.” The stock went up beautifully in the next few weeks. I think it’s not really a stock subset; he’s built an amazing company. I think that it’s really a good, symbolic way to think about the industry overall, because the cable industry, as it’s grown with its customers into new products and services, has never abandoned its base. It sounds like a political statement. But in reality, we are not going to leave the video business to get the broadband. We are going to lock the base of video and still be there for you, and improve that service while we innovate new services. Locking your base and not abandoning your base is a hallmark of the cable industry in my mind.
SCHLEY: And you can either name names or not, but maybe you haven’t seen that similar approach prevail in other examples of vertical integration, or have you? Has it been a basic way to frame those deals?
BOURKOFF: Go back to a deal we were not involved with, AOL Time Warner, one of these notorious transactions of our time: top of the cycle, and the Internet is going to come and save the content industry. It worked out the opposite. It worked out where the content company was preserving its value, and the Internet company in the form of AOL, at that time, after the transaction, started to erode its value. And if you look back on that deal announcement, there were billions of dollars of synergies that were promised between the two companies. If you juxtapose that announcement with Comcast-NBC, which happened after that, there were virtually zero synergies advertised. It was basically: we want to diversify, and we can operate these businesses effectively. That’s it.
I think that when you do a vertical deal, it makes sense if you are defensive—meaning, if a content company needs a big brother, so to speak, that makes sense. But if you want to be offensive about what a vertical deal looks like, you need a narrative that makes sense. What is different about this combined company in service to the customer, consumer-friendly, that did not exist before or separately? If it’s just diversification, like in the AT&T-Time Warner deal, which is obviously pending and being fought by the regulators—then it’s basically saying we’re diversifying a wireless business, a DirectTV business, with a content business (HBO, Warner Brothers and Turner), and we’re putting it all together because I think it’s a more diversified platform. Well, if you’re an investor—Wellington, Fidelity, Capital—you’ll say: I can diversify, thank you very much. I can buy a content company, I can buy an intruder. I don’t pay my managers, or judge them based on diversification. I judge them based on creating value and performance. So, you need a narrative for the consumer. Amazon Whole Foods is a good example of the new technology. Amazon buys Whole Foods; Amazon is not necessarily the most beloved company in Washington, DC, these days. But that deal was announced and approved in 90 days. Why? We are going to give the consumer lower-priced products: cheaper avocados, everyone likes it. Makes sense. Diversified.
SCHLEY: That said, I want to re-emphasize you did also say that management acumen was a big driver of value in the Comcast-NBC arrangement, and always is, I guess.
BOURKOFF: That is a great point. Management acumen deserves a lot of leeway when they’re doing deals. Investors that have seen a CEO and a management team deliver over time and deliver outstanding high performance should get leeway in the ability to manage other businesses or adjacent businesses—
SCHLEY: Because they’re good.
BOURKOFF: Correct. Especially if it’s in their existing business sector. A content company with a content company, a distributor with a distributor. If a company has a strong manager then veers outside—either geographically or in other segments like a conglomerate strategy—then an investor over time may be a little more suspect and say, can you really manage that business just because you can manage your core business? So I think it depends how far afield you get.
SCHLEY: I wanted to talk to you about current threats, but maybe in this context: can you think of a moment in the past where it has seemed like the cable industry has faced a competitive threat? Whether it’s DirectTV, or the DVR, or—I don’t know—and responded in an intelligent, ultimately successful way? Is there an example of that that comes to mind? Where the cable industry has successfully reacted to a new market condition?
BOURKOFF: Yes. Always. I think cable has seen new technologies emerge that could have disrupted the industry at every turn. And has learned from those disruptive forces to address and nimbly create those on their own. The DVR is a good example. TiVo created the DVR, right? The cable industry quickly adopted it and integrated it within the product to the consumer. The same can be said for products like video on demand. Remember companies like Diva, that were created for video on demand…third parties. Ultimately the cable industry did that. The biggest exception I would say to that is Netflix.
SCHLEY: I was just going to get to that, so go with it.
BOURKOFF: Netflix, if you really boil it down at its core, was what we all grew up with, with the cable industry, which was pay-per-view. And pay-per-view was a library that could be available in many different places that didn’t necessarily have a great graphic. And Netflix came along and had posters instead of text, and had a library that was easily digestible with a great brand, and it created a global marketplace where the consumer base that is a channel, that is outside of the cable industry and the cable ecosystem. The cable industry still has not exactly responded to that, but they will. Because the cable industry has the consumer and they will create a direct to consumer model at some point; they have to, especially given the relationship with the content providers.
SCHLEY: Because it all seems to come down to—I won’t use the word “owns;” nobody owns a consumer relationship—but who has a billing relationship with a customer. That’s an essential ingredient, right?
BOURKOFF: Correct. I think that was a hallmark of the industry and it continues to be a hallmark of the cable industry, which is, “Never give up the customer.” Never give up on the customer and never give up control of the customer. Juxtapose that with the telecomm industry. We grew up with Bell Atlantic, NYNEX, now Verizon or AT&T—all the predecessor companies.
SCHLEY: Mountain Bell.
BOURKOFF: Correct. And we used to buy, growing up, an AT&T phone, or a Bell Atlantic phone or a Verizon phone. Now we don’t. Now we buy an iPhone. Or we buy an Android phone. Apple or Google. The telecomm companies gave up control of the consumer to the technology platform, and therefore became a backhaul network provider. And now, they’re trying to regain control of the consumer through new applications or getting into content or other things. But that was a blunder in my mind. The cable industry never lost the consumer.
SCHLEY: OK. Here’s my worry, and I’ll tell it to you anecdotally and you can talk about the industry implications. Yesterday, I finally launched Amazon Prime on my Apple TV platform. It’s finally available for Apple TV. And I’m showing it off to my wife. They’ve got some good original programming, “Transparent” and some others. And she looks at it. And she says to me, “How much is that going to cost us?” And I said, “It’s free.” So free is a tough business model to compete with, isn’t it? What do you make of that?
BOURKOFF: You make it up in volume, they say, right? [laughter] But there’s something to be said for that. The technology platforms have an unrivaled global customer base. The Googles, the Apples, the Amazons, the Netflixs, the Facebooks. They service billions of people around the world. The cable industry, for all of its might and all of its innovation, still has a regional, sometimes national—maybe more in Europe—but even in the U.S.., it’s a regional customer base. Moreover, the technology platforms are very efficient customer platforms. You use Amazon, you use Google, do you ever call them? Never.
BOURKOFF: When you use cable, the cable industry has invested in customer service. That’s viewed as a cost or “friction” service. When you call the customer, or the customer calls you, they’re usually complaining—we probably have to edit the language sometimes, right? Imagine if that were converted to a sales proposition, actually an opportunity to increase consumer attention. Or imagine if you never need to call the service providers at all because it’s so easy to use. I think that the cable industry has a very local business still, and is very consumer-oriented, very customer-centric partially because they have this ongoing interaction, for better or for worse, with their consumers. Google and Amazon do not. So to answer your question, they have a volume base of customers that all different products and services can be sold through and you can make money in many different ways given that volume.
SCHLEY: So you’re saying that’s a resource and an asset, the customer infrastructure, if you will.
BOURKOFF: For the cable industry?
BOURKOFF: It has been a source of friction. But it has been converted in a large respect. I mean, Comcast does not get enough credit for building a great operating company. The customer service, when we all first started in the industry, it was at the bottom of the barrel. It was the airlines and the cable industry—
SCHLEY: I remember.
BOURKOFF: —competing for last place. You don’t want to be there. And then I think the competition helped out because DirectTV and to some extent DISH, were much better at customer service. And the cable industry really improved. And then I think there was organic innovation about how to create streaming services like X1 or Spectrum, or how to create the DVR, or other products and services, and that’s the innovation I’m talking about: to constantly be nimble, and bob and weave with the customer to improve the service offerings. And I think Comcast and Charter—by the way, Charter is still integrating the mergers—have become a lot more than just a series of acquisitions. They’ve become a customer service company that I think everyone’s proud of today.
SCHLEY: Should we worry about erosion of the video subscription category from the posture of the cable industry?
BOURKOFF: I think we should worry about the alignment between the spend on content, and the customer take rate of the video. Meaning, Netflix spends approximately $7 billion a year on content. And every quarter, every year, their customers go up around the globe. The cable industry spends probably $50 to 70 billion a year on content. Ten times what Netflix spends. And their customers are choppy, sometimes go down every quarter, every year. That’s not alignment. The reason for that is, the model is shifting to the consumer model directly. So, the cable industry will have to re-orient the video business to be a direct to consumer model. To do that effectively, they’ll need a national platform in my mind, and effectively they’ll need a different relationship with the content companies that will be much more of a partnership to get to the consumer. And that I think will be the next evolution of the video business.
SCHLEY: Can you detail what you mean by a national platform?
BOURKOFF: Comcast and Charter working together to reach the consumer. AT&T has a national platform with Direct TV. Verizon doesn’t yet have one. But I think the cable industry needs a national platform to truly use content effectively and to truly reach the consumer in a competitive way. Mike Fries and Liberty Global have those features in Europe. One of their distinguishing features in Europe is that they are national providers, not regional providers. In the Netherlands there is a national player and that’s Mike at Liberty Global. Same with Germany. There may be competition, but they’re not playing regions, they’re playing national.
SCHLEY: Border to border. Talk about again your decision to form LionTree. What compelled you to kind of take that plunge, if you will?
BOURKOFF: It did feel like a plunge at the beginning, but thankfully it worked out. When I was at UBS, I had a great experience, a great partnership. I really was moving, as I said, in my career, trying different things. But ultimately, working for a big bank was limiting in some ways. And I found during the financial crisis an opportunity to get back to the basics of banking or advisory, which meant relationship-driven. And I really felt that after now twenty years of doing it, the relationships would be there for me and I would be there for them. And I thought that was a lot to hang my hat on to start a company.
And two, the basics of banking, going kind of old-school merchant banking—the old British model of merchant banking, sitting at the same side of the table as your relationship, plotting for the future together.
SCHLEY: I never knew what that term meant. Merchant banking. Now I know.
BOURKOFF: And then juxtapose that factor of nostalgia of going back to the basics with a very forward-looking approach in the industries that we’re focusing on, media and technology, because things are changing and were changing so quickly. I loved that paradox. Go back, go forward. And that moment in time created itself, and LionTree was born out of the financial crisis. And in an industry that I thought could use focus on just this industry. So, LionTree is a merchant bank in a very traditional sense, but only focused on the media, technology, telecomm industries globally. And so we started in June of 2012. And the number one differentiated thesis for me was to focus on the large transactions. Because usually a lot of these firms exist and they’re small, they’re nimble, but they focus on the emerging companies, the emerging technology, the smaller deals. It’s still very important because they’re growing, but I like the dynamics of the strategic shifts—
SCHLEY: I can tell by the list.
BOURKOFF: And luckily that worked. We, over the last 5½ years, 6 years, have done over $350 billion of transactions. The first deal we did—actually the first three deals were cable deals. The first one was a cable deal with Liberty Global and Searchlight in Puerto Rico. That was a smaller transaction. The second deal was for Jerry Kent and Suddenlink, selling it to a private equity firm for $9 billion, which was at that time the largest leveraged buyout of the year. And then we subsequently sold that to Altice, Patrick Drahi. And the third deal was for John Malone and Mike Fries, advising Liberty Global on buying Virgin – Richard Branson, in the UK – which was a 24 billion Sterling transaction. And those deals were privately done, never leaked. We pride ourselves on being discreet. And I always say that the 24 billion Sterling transaction for Liberty Global with Virgin gets the award of being the largest transaction for the smallest amount of square footage. Because at the time we were in a small office space. But it’s really a relationship and the idea flow that allowed us to work with these great entrepreneurs and to do those deals. And one deal begets another. So the story is that on the plane from New York to Denver, to go and approve the Virgin deal in the Liberty Global boardroom, John asked me if I would fly with him.
SCHLEY: John Malone?
BOURKOFF: John Malone. And I said, of course. And I have found in my career that plane time with John is extraordinary. Because you have time to go deep, to go broad, to discuss technologies, to discuss deals, and it’s one of the best experiences of my life frankly. And on that plane ride I asked John, “What is it about this Virgin deal and getting back into the cable industry that’s exciting you?” And he talked about broadband and delivery. I said, “Do those same rules apply to the U.S. as Europe?” He said, “Absolutely. What could we do in the U.S.?” And the day before, I had been thinking about Time Warner Cable – Glenn Britt and Rob Marcus running it – being a good candidate to buy Charter Communications, which at that time was owned largely by private equity. They had to own it through the re-structuring. Apollo, Oaktree, Crestview. And they owned about a third of the company and controlled the board or had influence over the board. And the day before, Glenn Britt and Rob Marcus said to me, “I don’t think Time Warner Cable wants to be the consolidator, so we’re not going to do that Charter deal.” So, on this plane ride with John, it was fresh in my mind. And I said, “In the U.S. actually I think there’s one that’s interesting for you.” He said, “Which one?” I said, “Charter. In the same way that Rupert Murdoch owns 35% or 40% of Sky, BSkyB, and still has say over the board, you could own a third of the company and have the same dynamic with Charter, and in fact, the private equity holders have made a lot of money already in the stock and they’re willing to sell it, in my mind.” And he said, “How quickly can you do this?” I said, “I don’t think it will take that long, frankly, because they want to sell.” And as soon as I got off the plane, Greg Maffei, the CEO of Liberty, called me and said, “I heard about your conversation with John. Let’s go.” And you know, a few weeks later, we did the transaction at $95.5 per share, which John invested. And the stock today is $350, approaching $400 per share.
SCHLEY: Can I ask you how do you maintain confidentiality during a big picture deal like that, and is it any different in the cable industry than any other sector? Culturally, how do you impose that kind of discipline?
BOURKOFF: Well, first the firm that we operate, LionTree, has as part of its culture from day one to be discreet. So there are no committees where you are involving other people that are not involved in the transaction, like there would be in a big bank. Not to say the big banks are indiscreet, but we know everyone that’s working on the transaction, and there aren’t traders or managers or other people that don’t have exposure to the relationship and feel some personal loyalty all the way through.
SCHLEY: That’s key, I think.
BOURKOFF: You don’t want to disappoint your friends, you don’t want to violate confidentiality. And you want to have the deal be announced on your own terms and have it be successful, obviously—there’s a logical argument. When you start a company, you have the ability to put logic in place as the rule, and not try to fight for it. So I think that has a lot to do with it. It’s the kind of people you have, the kind of people you hire, but it all goes back to the alignment with the relationship and the entrepreneur. We’re entrepreneurs, we’re entrepreneurial, they’re entrepreneurial, you’re all trying to get to the right place, which is to create value. And you don’t want to disappoint people that you know personally. And that’s where I’ve been fortunate to grow up in the industry and hopefully continue on for a long time.
SCHLEY: But I think that’s a neat story about the ability of someone like Liberty to turn quickly, to make a deal happen and to be able to make phone calls that set something in motion pretty quickly and pretty privately.
BOURKOFF: Correct. Being nimble is important. Seeing opportunities out of chaotic moments or experiences is very important and differentiates this industry from bureaucratic companies that are around for a long time.
SCHLEY: I wanted to touch on, if I could, two more areas since we have you. One is, you talked about—you’re so familiar with Liberty Global and their ability to begin a quad-play kind of offering that includes a wireless component. And we’re sort of trying to catch up a little bit in the U.S. Do you like what you see happening there, in terms of an economic model around quad-play?
BOURKOFF: Quad-play refers to having video, voice in the form of hardline telephone, data, and mobile, all together. I think the company that has done the best in my career has been Rogers Communication up in Canada. You had Rogers put that in place and execute it phenomenally well.
SCHLEY: That’s a good point.
BOURKOFF: I have not seen it executed to that degree anywhere else in the world. But every market is different. I think Liberty Global with their acquisitions and strategies in Belgium, for example, are at the forefront in trying that strategy out. There’s a tremendous amount of synergy when you bring a mobile company together with a cable company. But I think every market is different and has to be really shared infrastructure and demonstrating an ability to lower the churn to the customer while increasing the take rate and ultimately being able to raise prices more effectively than before. In the U.S., now there are other ways to get at mobile. There’s an MVNO strategy and a lot of the companies here are approaching it that way, with an MVNO partnering with, say, a Verizon or a Sprint versus owning the wireless platforms themselves, which is inherently competitive.
SCHLEY: Rogers has done a good job of achieving those exact sort of approaches and metrics that you just described.
SCHLEY: In Canada.
SCHLEY: And then just would love to do the question everybody always poses: do you see more consolidation occurring within a three-year timeframe, for instance, on domestic cable?
BOURKOFF: Yes. I think the M&A cycle overall for the economy has been very robust and strong. We’re eight or nine years into a bull market. And the M&A valuations are historically at high levels. So you could see headwinds for the overall M&A landscape because values are high, prices are high, multiples are high. But the media industry, the cable industry, I think, will buck that trend and will continue strongly in a consolidation cycle because there still is a lot of fragmentation. There needs to be more scale among content providers. And the distributors, as I mentioned before, have to go national and ultimately global. You’ve never yet seen a global communications company
SCHLEY: That’s an interesting point.
BOURKOFF: And I think you will in the future. And then when you get to that point, then you’ll see real vertical integration which is content distribution across a global customer base. I think the other reason for it is these businesses are going through a lot of transition, particularly the content industry. And when businesses go through transition, it’s hard to do it in a public market lens. Everyone’s judging every turn and it’s hard to transition. So the best way to do it is tucked underneath bigger platforms sometimes. I think that will be a key part of the consolidation strategy as well, both in the U.S. and globally—Europe and Latin America, potentially Asia in the future, although it’s a different kind of market there. The impediments to those deals will be regulatory and potentially rising interest rates. We have had a great environment for low interest rates and leverage capacity and almost limitless cash out there.
SCHLEY: You can do a lot of things.
BOURKOFF: You can do a lot of things, exactly. But I think rates will eventually come up again and that will be a sobering factor, and the regulatory jurisdictions are unpredictable right now. So having more diversification around regulatory regimes will be important.
SCHLEY: This is a hot and sensitive subject, so you address it at will. But do you see new business opportunities occurring should the change in Internet regulation in the U.S. that’s being contemplated today, indeed be the law of the land?
BOURKOFF: You mean with net neutrality?
SCHLEY: I do.
BOURKOFF: Rolling back net neutrality, in my mind, is effectively putting the confidence back in the marketplace versus the state, so to speak, or the government to regulate it. Which basically is an endorsement of this entrepreneurial industry to self-regulate. Because it is competitive. As I mentioned, the technology platform, with the cable platform, with the wireless platform, and you have satellite; so there are many products and services the consumer wants to get to. And they have many ways to get there. Do you want to get a Roku device in your home? Or do you want to have a DVR from the cable industry in your home? Or do you want to have an Alexa/Amazon product in your home? How you get there really depends on innovation and technology and getting to the consumer. The industry can’t afford therefore to block content that a consumer wants, because they’ll get burned. Imagine in a very straightforward way and a very historical way: if a cable company wanted to drop ESPN, even if ESPN is maturing in some way, it would be almost impossible to do it because the subscriber loss they would suffer would be so dramatic that it would be a value-eroding exercise. Why would they lose subscribers? Because of competition. It’s the same argument.
SCHLEY: Comcast wants innovation to occur around these broadband IP networks because ultimately, it’s good for business. Is that fair?
SCHLEY: What haven’t we talked about that you think is important to convey, either looking forward at where cable is going from an investment posture or kind of tracking where we feel wide open? That’s sort of an open-ended last question.
BOURKOFF: I am very forward-looking in the way that we do deals and try to position the industry as best we can for unlocking value or strategic alignment. At the same time, I love that I have been around this industry for a few decades already, a couple of decades, and have seen a lot of these deals basically take shape based on a longer-term narrative. And that appreciation and that richness is why I love coming to work every single day and love focusing on this industry. So, when you see Brian Roberts and John Malone having Comcast and Charter collaborating on wireless strategies, you know that that relationship has taken a lot of different turns. I’ve seen it happen at different moments in time. And having that collaboration for the benefit of industry leadership is so exciting, especially when you know the history behind it. And the mutual respect they have for each other is so great to see.
SCHLEY: I love you referencing history and its importance because those of us who have grown up in and around cable—you almost have this presumption that other industries operate the same way. The retail industry or the banking industry or the transportation industry, it’s really not so, right? There are some unique qualities…
BOURKOFF: And I always, when I talk to our team or train our bankers, I try to make a point of “past is prologue.” So, when you look at these new trends and you think about the world changing and we’re going to live forever, or our kids are going to be immortal and we’re going to have robots, as many as humans, and artificial intelligence. And I said, “Let’s just go back to how innovation started in the cable industry because that took a long time to materialize to where it is today.” And that was new technology all the way through.
Steve Jobs famously said that the definition of media is content distributed through technology. Technology used to be a newspaper, or a book. Or a broadcast station. Now technology can be—
SCHLEY: A radio station.
BOURKOFF: Amazon. It could be something different. But fundamentally boil down what the application is, and you re-define it for our age. And I think that provides a lot of context and a framework for approaching value, deals, advice. And ultimately the relationships are the most important thing because all these companies are run by a human being who has everything on the line with every decision he or she makes. And to appreciate that – as an advisor, as a dealmaker, as a writer, as an observer – is demanded, is warranted, because these are more complicated companies than ever before. And they have to grow to have value creation at their disposal. You could have a great company; if they stay the same, then the stock goes down. So it’s hard to grow these companies.
SCHLEY: Your point that past is prologue, there can be no better justification for this entire oral history series than that theme. So, Aryeh, thank you so much for taking your time to share your thoughts and—
BOURKOFF: My pleasure.
SCHLEY: I greatly appreciate it. For the Cable Center, I’m Stewart Schley.