AT&T's Broadband Ball in its Court, Comcast Ponders Options
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Lurking around all the industry buzz this week regarding Comcast Corp.'s $58 billion stock and debt bid for AT&T Broadband is whether the Philadelphia-based cable provider will bring on a partner to help juice up the price.
On Wednesday, 10 days after receiving the offer, AT&T's Board of Directors rejected Comcast's hostile bid to acquire Ma Bell's cable and broadband assets, calling it inadequate and saying it still planned to spin out the cable division as part of an overall restructuring into four separate companies.
When it made its offer public last Sunday, July 8th, Comcast offered to merge with AT&T Broadband for $41 billion in stock and assume $13.5 billion in debt. Too low, went the rejoinder from AT&T, but enough of a hint that it was interested in entertaining another offer. And that was enough for Comcast's president Brian Roberts to keep the ball in play with his public statement, even though he disagreed with AT&T that the offer was "inadequate."
"Since our announcement, AT&T shareholders have responded to our proposal by adding over $14 billion in market valuation to AT&T," Roberts' public response went. AT&T's concerns over the multi-tier voting structure in the deal that essentially gives the Roberts family a majority of the votes in a merged entity are also largely viewed as a red herring by industry players and people who know both companies.
Now, with AT&T effectively hinting at Comcast to come back with another offer, observers and analysts alike say the parlor game over what might unfold includes two scenarios.
The main one, widely reported, is that Comcast will just up the deal offer, which right now values each of the 14 million AT&T cable customers it is looking to acquire at about $4,000 a piece. The consensus is that the offer was typical of the lowball bid that gets the action and an auction started.
But with 38 out of the top 50 AT&T investors also holding shares of Comcast, a significant boost in the bid price could hurt Comcast and stir up the wrath of the Wall Street community, which has been lavish in its praise of Comcast's management and its contributions to shareholder value.
The other scenario -- which Comcast spokespeople privately scoff at -- is that Comcast would bring in another partner -- possibly its investor Microsoft Corp., or even satellite player EchoStar Communications Corp., AT&T Broadband's neighbor in Colorado -- to sweeten the pot and scare off any potential bids that competitors might be cooking up. Or another satellite player may make a counter bid.
Microsoft wants to be a player in the broadband market, observed Vince Vittore, the executive editor of Telephony Magazine who covers broadband and telecommunications issues. And it hasn't had "a fantastic (broadband) strategy up to this point. This would make a nice link up between the Microsoft Network and the cable and broadband market that it wants into."
But as a convicted monopolist with a pile of legal challenges to contend with, Microsoft as a player in the drama adds odds that regulatory and legal hurdles could slow Comcast down or even hurt the deal. To which supporters of the Microsoft scenario echo Vittore's view: "Just because you're big and powerful doesn't mean you're not allowed to buy things."
A partnership -- or even a bidding war -- with a direct broadcast satellite player may get scoffs from Comcast people, but Richard Doherty, president of Envisioneering, Inc., a cable and broadband research and consulting firm, said it's on plenty of players' minds. Especially when one considers that AT&T's CEO, C. Michael Armstrong, knows a thing or two about satellites.
And with studies already showing that consumers are opting to keep their cable connection when they sign up for Direct TV or other forms of satellite TV, the prospect makes sense when considering the cable operators' strategy of "packing the pipe" with interactivity and other Internet gee-gaws as the cable pipe is turned into a broadband connection.
"If you put a satellite dish on a household and have cable for local programming, that frees up dozens of channels for interactive services, for high speed broadband over cable lines that needs to be local, like voice telephony that needs to be two-way, and video on demand, local sports," said Doherty. "That's why they're very complementary."
With plenty of estimates and studies that say AT&T's broadband plant in Denver is way behind in plans to upgrade its cable network for broadband over cable, a satellite player involved in the deal with Comcast might actually make sense when handicapping what could play out in the hostile bid.
But while AT&T prepares to unveil its second quarter earnings on Monday, July 23rd, observers say don't hold your breath for a meeting or any action until after the results are released, despite Comcast being at the ready at a moment's notice.
After all, this is just the end of Round One in what could go 10, even 15 rounds, industry experts and observers said.
And don't forget that Comcast could just walk away from the whole thing if the price gets too high, noted one observer familiar with the matter, which would leave AT&T to explain to its shareholders how it plans a return on the $100 billion investment the company has made in broadband thus far.
So the scene may be quiet on the surface right now, but with Comcast bidding to buy some 14 million of AT&T's subscribers to become the nation's largest broadband communications provider, with approximately 22 million subscribers in eight of the nation's 10 largest markets, it would be hard to find anyone connected to the cable industry sitting quietly by this weekend.
As The New York Times reported this week, AOL Time Warner could be mulling a plan to get in on the action and other major cable players are said to be preparing their own counter bid to stymie Comcast's ambitions.
"These are poker games, with people whose emotions sometimes run over their logic," added Doherty, which keeps the intrigue notched up as the play unfolds.
A Comcast spokesman declined comment on the scenarios. AT&T did not return calls by press time.