Comcast Bid for AT&T Broadband Roils Cable Industry: Additional Offers Could Surface, But Analysts Warn That Any Bidder Would Face Hurdles

The $44.5 billion bid by Comcast Corp. for the AT&T Broadband unit of AT&T Corp. probably represents the death knell for the cable empire put together by AT&T CEO Michael Armstrong over the last few years. The unsolicited Comcast bid, announced in early July, offers $44.5 billion in equity plus the assumption of $13.5 billion in debt, for a total value of $58 billion. Armstrong bought Tele-Communications Inc. and Media-One Group Inc. for more than $100 billion to create AT&T’s cable operation, which is the largest in the country. Last fall he announced plans to break up AT&T into four companies with four stocks, one of them being a tracking stock for the broadband unit. AT&T rejected Comcast’s offer a week after it had been floated on the grounds that it didn’t reflect the “full value” of the cable systems. But most observers say that the telecom giant’s broadband unit is now effectively in play, whether or not additional bidders come out of the woodwork. “If, by the first week after Labor Day, no other bidders have come forth, the AT&T board will have to weigh the Comcast offer seriously and use what leverage they have to improve the terms,” says Blair Levin, a telecommunications analyst at Legg Mason. Levin says that any successful bidder for the broadband unit has three types of hurdles to clear: financial, regulatory, and management. “There aren’t a lot of companies out there that you could say clearly qualify on all three fronts.” Among potential bidders for the broadband unit are AOL Time Warner Inc., Cox Communications Inc., Charter Communications Inc., Vivendi, Comcast Corp., and Walt Disney Co. Levin says that a weakness in a potential Disney or Vivendi bid would be either company’s lack of cable management experience, while the cable operators may have financial or regulatory problems with mounting a successful bid. Speculation about an AOL Time Warner bid has been rife, but analysts have noted that there would be huge regulatory problems to overcome in any attempt to link AT&T, the No. 1 cable operator, and AOL Time Warner, No. 2. Comcast is the third-largest player. “If you thought the approval process for AOL/Time Warner was a circus, and it was, with everyone and his brother coming out of the woodwork to object, the hearings on an AT&T Broadband/Comcast merger would be a circus squared,” says Scott Cleland, CEO of Precursor Group, a Washington, D.C.-based research group. Among the problems with the initial Comcast offer is the disproportionate voting control that Comcast’s owners, the Roberts family, would retain. As the offer now stands, the Roberts would own no more than 1% of the newly formed Comcast/AT&T cable business but would control more than 42% of the voting shares. Levin says that there are a large number of shareholders who own stock in both AT&T and Comcast and they are not horrified at the prospect of the Roberts family taking over AT&T Broadband. “If Comcast still has the only bid out there, the corporate governance issue is something that the parties should be able to work out,” he adds. Levin says that Comcast has a very bottom-line-oriented corporate culture and has had a successful record in increasing revenue from its network. Cleland also comments that Comcast has always returned a lot of money to its shareholders and has been prudent in its spending, while AT&T has historically displayed a pattern of overspending. “If you overpay, you lose in making these acquisitions,” he says. He points to the more than $100 billion that AT&T paid for Tele-Communications and MediaOne Group as examples of AT&T’s tendency to pay too much for assets. The so-called convergence theory, part of which is based on the belief that cable lines will be in the forefront of the delivery of a variety of new services – from Internet access to movies on demand to two-way communication with vendors – is the foundation of much of the m&a activity in the cable industry. However, Cleland warns that convergence is a lousy investment thesis. “If you’re an investor who wants an early and reliable return, these convergence plays are front-loaded with big-time costs and uncertain payoffs in the longer term.” As for Comcast’s move on AT&T, Cleland says that if some other company can muster a competitive bid to go up against Comcast’s, “the marketplace and shareholders will determine which offer is best.”