RealTime IT News

Comcast's AT&T Cable Bid Likely To Prevail: Analysts

Even though Comcast Corp's hostile $44.5 billion bid for the cable assets of AT&T Corp. works out to about 35 cents on AT&T's dollar investment in the division, analysts and observers of the cable and broadband market think Comcast may prevail in its quest to take over the nation's largest cable provider.

First of all, there are enough investors who want the head of AT&T's CEO Mike Armstrong, said Richard Doherty, president of a computer and cable industry consultancy Envisioneering, Inc. based in Seaford, Long Island.

"There are very few widely held media companies that have lost as much value as AT&T has in the past year," said Doherty. "It has been horrible."

AT&T's $22.24 closing price as of Friday (not counting the adjustment for today's spin-off of its wireless division) is down about 32 percent since the last quarter and its losses have averaged about 24 percent in the past few quarters, making it ripe for a merger or even hostile takeover of the cable properties, Doherty added.

Class A shares of Comcast closed at $42.48 on Friday but had slipped about 8 percent during Monday's trading session on the Nasdaq. AT&T's price had jumped by over 11 percent to $18.69 (which also reflects the wireless spin-off) on the New York Stock Exchange Monday.

The Philadelphia-based Comcast, meanwhile, has managed to produce about a 24 percent annual return for its investors for close to 20 years.

Plus, in taking his case to major shareholders after efforts to negotiate a merger were rebuffed late last year, Comcast's president Brian Roberts now has the attention of media moguls who are gathering in Sun Valley, Idaho for investment banker Herb Allen's legendary media confab.

Some of the cable players at the event (who are probably behind parts of the deal anyway) could significantly influence the vote on Comcast's behalf, noted Doherty.

And there's also no guarantee that AT&T's own plans for an initial public offering for the broadband division would reach as high a valuation or see the management turnaround to justify the tens of billions that have been lost in the company's many-headed digital media strategies.

AT&T on Monday said it would evaluate the Comcast bid to issue 1.0525 billion shares of Comcast stock for the AT&T cable and broadband division, which was received last night. Eileen Connolly, a spokesperson for AT&T, said the company had only received the proposal on Sunday and needed to look it over.

Although AT&T has said it has no current plans to sell the broadband business, including the cable companies, "we will evaluate the Comcast proposal and do what is in the long term interest of our shareholders."

Based on Friday's closing AT&T price, the deal was valued at $44.5 billion, and included the assumption of $13.5 billion in debt for AT&T's core broadband business which includes its 14 million cable subscribers.

Comcast said the deal would create the nation's largest broadband provider with 22 million subscribers in eight of the nation's 10 largest markets. The price values each cable customer at about $4,000 each, which Comcast called more than fair.

Of particular interest, and somewhat overlooked in the early reporting on the bid, are the content assets that Comcast is eyeing, said Doug McIntyre, CEO of broadband technology provider On2 Technologies of New York.

Comcast is looking to acquire AT&T's interest in Time Warner Entertainment, Cablevision and Rainbow Media as part of the bid.

"Comcast has done a very good job managing its content properties. Now, look at what Comcast could end up doing. The deal could give it a huge amount of (cable) pipes into 20 million homes to put broadband into. To possess other content assets that could be sent through those pipes is of tremendous value," said McIntyre.

It also may be one reason among many that shareholders could expect a bit more sugar on the deal, noted Broadband analyst Mark Fox of market research firm Allied Business Intelligence in Oyster Bay, NY.

Not only does he expect Comcast to sweeten the bid financially, but the management structure and voting rights would have to be addressed too. For example, industry observers and reports have already noted Armstrong's interest in the AT&T broadband division as part of his exit, once the group is split into four separate properties following today's spin-off of the wireless division.

Shareholders may want to take a closer look at the voting ratio of the deal thus far, but "Roberts stands a good chance of pulling this off and creating a major digital media property," added Doherty. Given the losses that AT&T has wracked up investing in cable upgrades for interactive and digital media over cable lines, and that it is now selling or spinning off properties to help ease the division's debt, Comcast now has an edge with influential companies that could have a say in the deal.

"Microsoft could have invested in Paul Allen's companies and lost less money than they did with AT&T," quipped Doherty of the Microsoft co-founder who is better known for building visionary properties than healthy returns for investors.

Microsoft recently experienced a setback when AT&T backed off its commitment to its joint deal to pursue development of advanced cable set-top boxes, a digital media deal that had cost Microsoft a reported $5 billion investment.

Overall, AT&T lost about $373 million on $16.8 billion in revenue during the first quarter, much of that a result of charges it took in relation to its investment in broadband cable provider Excite@Home.

The broadband division took in $2.5 billion for the first quarter, about an 11 percent improvement over the same period in 2000. Although the company doesn't break out its net income for the broadband division, it did declare $394 million in cash flow earnings before interest, debt, taxes and other charges.

Although the division's debt load was about $28 billion as of the end of the 2000, the company has reduced that to between $14 and $15 billion as of the end of March with sales of assets and other restructurings.

AT&T is expected to comb over the deal for much of the week, with an especially keen eye on how the merged company's voting shares would be structured. The Roberts family is known for carving out a voting majority with its public properties and this deal has similar markings. That could be problematic for the widely-held AT&T.

Still, with investors frustrated with the company's losses, and while it starts to unfold its plan to split into four separate companies and sell off other assets, "it's an excellent window for Roberts to get his message to the public," Doherty said.

Added McIntyre: "I think Comcast understands that scale is going to be important particularly if dealing with entertainment properties. Plus, the company has a venture capital arm that has invested in a bunch of interactive strategies. I think over time it will be an important part of its digital media strategy."