ANALYSTS SEE COMCAST HOLDING UPPER HAND FOR AT&T BROADBAND
Now that AT&T’s board has basically put its cable operations up for sale, Wall St. and public policy analysts believe several other large media firms may well bid for AT&T Broadband. They also see possibly lengthy, drawn-out battle for AT&T’s cable unit as parent company angles for time, delays its spinoff plans and seeks to boost unit’s financial performance and value to earn higher offers. Moreover, analysts predict that several other MSOs may end up with chunks of AT&T Broadband no matter who makes eventual winning bid. But they still view Comcast as favorite to win overall sweepstakes because of its strong balance sheet, highly regarded management team and relative lack of antitrust and other regulatory hurdles to overcome.
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As expected, AT&T board unanimously rejected Comcast’s unsolicited $44.5 billion offer for AT&T Broadband late Wed., saying that Comcast’s proposal “does not reflect the full value of AT&T Broadband” (CD July 19 p5). In brief letter to Comcast Chmn. Ralph Roberts and Pres. Brian Roberts, AT&T Chmn. Michael Armstrong also expressed reservations about voting control that Roberts family would have over combined Comcast-AT&T Broadband operation. Under Comcast’s July 8 bid for AT&T Broadband, Roberts family, which now holds 86% voting control of Comcast despite holding only small fraction of stock, would gain 45% to 49% voting stake in much larger Comcast-AT&T despite its relatively small stock ownership. “Further, the board is concerned that Comcast’s multitier voting structure would put AT&T shareowners at a disadvantage in matters of corporate governance,” Armstrong wrote.
Nevertheless, AT&T’s board voted to delay completing and mailing proxy materials to its shareholders detailing company’s plan to create separate tracking stock for broadband unit in fall. Just as notably, AT&T said board members directed management “to explore financial and strategic alternatives relating to AT&T Broadband, including the previously announced restructuring plans.” Even though company said its board “emphasized that it remains committed” to its restructuring plans, industry observers said those steps meant that AT&T was likely to end up selling its broadband unit.
Analysts said list of possible suitors included such pure cable companies as Charter and Cox, both of which have been aggressively pushing to boost their size. List also includes such major media and other companies as AOL Time Warner, Walt Disney Co., Vivendi Universal, Viacom, EchoStar, USA Networks and even AT&T’s own Liberty Media unit, which is about to be spun off as independent company. In addition, analysts see possibility of joint bid by 2 or more of those companies, possibly backed by financing from Microsoft, Bell operating company or international carrier. “We believe that media executives now believe the antitrust line is effectively the main line they have to avoid crossing,” Legg Mason Analyst Blair Levin said. “We further believe that the Comcast bid for AT&T Broadband (as well as the News Corp. bid for DirecTV) may well catalyze a broad spectrum of media players into thinking about crossing horizontal and vertical boundaries that previously had not been allowed.”
As result, industry observers think AT&T may drag out process for month or more to allow other bids to crystallize. They also see AT&T biding its time so it can demonstrate that its broadband unit is performing better financially and thereby deserves higher price. Indeed, in one such effort, AT&T said it planned to present “a comprehensive financial and operational update” on its broadband business to analysts and reporters through July 24 conference call and Webcast. Banc of America Securities Analyst Douglas Shapiro said that move “strongly suggests it [AT&T] plans to press its case with investors that the company is already on the path to improving profitability and the current offer is too low.”
Although analysts differ over likelihood of competing offers for AT&T Broadband, they see such other MSOs as AOL Time Warner, Charter, Cox and even Cablevision Systems reaping benefits from Comcast’s hostile bid. They suggest that Comcast might neutralize its possible rivals by giving them what they want most -- offering AOL Time Warner carriage of AOL’s service on its high-speed cable lines and selling and swapping systems with Charter and Cox. They also argue that steeper regulatory hurdle (in AOL Time Warner’s case) and financial obstacles would make Comcast’s competitors more attuned to striking such deals.
Even without actual competing bids, however, analysts foresee Comcast eventually sweetening its bid to appease AT&T’s board and management, further swaying AT&T shareholders and wrapping up negotiations faster. They think Comcast might do that by agreeing to buy AT&T’s minority stakes in Time Warner Entertainment, Cablevision and Cablevision’s Rainbow Media unit, as it already has offered to do. They also believe Comcast could change its mix of stock and debt assumption or offer stock collar. As Shapiro wrote, “we think there is a fair chance it [Comcast] will need to raise its bid to get the deal done.”