Comcast makes unsolicited bid for AT&T Broadband
( 2001-07-09 12:03) (7)
Cable television company Comcast Corp. said on Sunday it made an unsolicited $44.5 billion stock bid for AT&T Corp.'s broadband cable business, in a move that would create the world's biggest provider of broadband communications.
Comcast, the No. 3 US cable-television company, said it made the offer for AT&T Broadband, the nation's largest cable television operator, after months of merger talks with AT&T failed. The bid comes as AT&T dismantles more than $100 billion in acquisitions to create separate companies for its broadband, wireless, and consumer and business telephone operations.
AT&T said on Sunday it has no plans to sell its broadband unit, including through the Comcast offer. AT&T, which plans an initial public offering of a tracking stock for the broadband unit later this year, said it would evaluate Comcast's proposal and respond.
Since AT&T announced its break-up plan last fall, market speculation swirled that its components would be acquired. AT&T Wireless, the No. 3 US wireless telephone operator, will become an independent company on July 9. Along with the broadband unit, it was seen as among the most likely takeover targets.
"None of this is a surprise. The big question since AT&T announced the break-up was which unit was going to be the first to be acquired," said independent telecommunications analyst Jeffrey Kagan.
"AT&T will cease to exist a year or two from now. All the pieces will be gobbled up and the AT&T brand name will be a nostalgic memory in the history of America business. Broadband will go, wireless will go, and some poor international company will take on the challenge of consumer and business," said one telecommunications industry banker who declined to be named.
A merger of Comcast and AT&T Broadband would combine former adversaries. AT&T launched an unsolicited bid for cable television company MediaOne Group Inc., and wrested it away from Comcast. Comcast got a $1.5 billion break-up fee for walking away from MediaOne.
DETAILS OF THE OFFER
Comcast said it would issue 1.0525 billion shares of its stock, valued at $44.5 billion based on Friday's closing price. The Philadelphia-based company said it would also assume $13.5 billion in debt owed by AT&T's core broadband business.
Comcast also said it is prepared to buy AT&T's holdings in cable properties controlled by Time Warner Entertainment, Cablevision Systems Corp. and Rainbow Media Group Inc. It said it was prepared to assume more debt and issue more equity to buy these assets, which have an estimated value of about $20 billion, one person familiar with the situation said.
Comcast said its offer would provide more value and less risk to AT&T shareholders than the planned spin-off.
"Not only does our proposal avoid the market risks, costs and uncertainties inherent in the planned broadband IPO, it values your business at a significant premium to your potential public market valuation," Comcast said.
AT&T shareholders would receive Comcast shares valued at $12.60 per AT&T share, and retain complete ownership of AT&T's historical communications business.
"This combined value is dramatically higher than AT&T's current market value," Comcast said.
AT&T's stock, which has fallen 32.9 percent over the past year, closed Friday at $22.24. Comcast's stock has gained 7.2 percent over that time and closed Friday at $39.44.
Comcast, which boasts a strong balance sheet, has been seen as the leading candidate to take over AT&T Broadband after its separation from AT&T, analysts have said. Comcast President Brian Roberts has said he would be interested in acquisitions, but there were few sellers in the cable industry.
"Comcast made no secret of the fact that they believed they can run these (AT&T) assets better," said CIBC World Markets analyst Jeffrey Wlodarczak. "I think most people were expecting Comcast to wait until the spin-off was complete and then make a bid. It's a little suprising that they felt they needed to move more quickly," he said.
Comcast told AT&T Chairman Michael Armstrong in a letter on Sunday it would submit its offer to AT&T's board later this month before the telephone giant sent its proxy on the broadband spin-off to shareholders.
If the merger is consummated, Comcast said AT&T shareholders would own a majority of the economic and voting interests of the combined company. That would allow the deal to be tax-free.
"There's no other suitor who can do this very unique structure. Comcast is the only one big enough to have the financial strength to do this, and the only one small enough so that AT&T shareholders would own the majority of the company," said one person familiar with the situation.
VOTING STRUCTURE, MANAGEMENT CONTROL ISSUES HURT TALKS
Comcast and AT&T held merger discussions off and on since November, but talks ended in recent weeks, some executives familiar with the discussions said.
Armstrong and AT&T Chief Financial Officer Chuck Noski backed the idea of an AT&T-Comcast merger, but AT&T's board of directors killed it over concerns about Comcast's voting structure and management control, one person close to the talks said.
The Roberts, which holds 85 percent of Comcast's voting control, had been willing to reduce this to less than 50 percent to allow the AT&T shareholders to hold the majority stake, a source close to the talks said.
AT&T's board was concerned the unit would not have a broad enough shareholder base, the source said. About 38 percent of AT&T shareholders also own shares in Comcast.
Another source, however, cautioned that discussions between the two companies were very preliminary and substantative talks about control and management positions had not been addressed.
REGULATORY AND OPERATIONS HURDLES ABOUND
Beside the challenges of an unsolicited offer, Comcast may face intense regulatory scrutiny and several operational headaches if it tries to absorb AT&T Broadband and its disparate technologies, analysts said.
A combination of the nation's biggest and third-biggest cable operators would draw scrutiny by antitrust enforcers at the Department of Justice, which examines competition issues. AT&T has been divesting certain cable assets to meet a pact with federal regulators when it acquired MediaOne to cut its share of the pay-television market to 30 percent.
It took almost a year for the Federal Communications Commission to review that deal and it was only approved after the companies agreed to major divestitures.
The company was deemed to hold about 42 percent of the market. But an appeals court said in March the ownership cap was unconstitutional and the agency has been working to rewrite it.
Comcast said the merger would create the world's largest broadband communications provider, with 22 million subscribers.
AT&T Broadband, assembled through the acquisitions Tele-Communications Inc. and MediaOne, "is a patchwork of different technology. It's networks and billing systems and service levels are not uniform yet. AT&T still struggles with it. That's one major headache Comcast would acquire," Kagan said.
Other analysts said Comcast has a proven history of absorbing different assets. "Comast is the blue chip cable company. They've done an extremely good job managing the acquisitions they've made so far. There's no reason to believe they couldn't handle this," CIBC's Wlodarczak said.
Faced with falling long-distance calling prices and increased competition, AT&T has been trying to shift away from its traditional voice telephone businesses to focus on faster-growing wireless, cable television, and Internet services.
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