AOL TW could hold the keys to AT&T deal

Jul 30, 2001  •  Post A Comment

AT&T Broadband may be the seller, but AOL Time Warner most likely will be the kingmaker.
AOL Time Warner holds enough key bargaining chips to significantly shape the sale of AT&T Broadband and AT&T’s key stakes in other cable companies such as Time Warner Entertainment and Cablevision Systems. AOL Time Warner could play that pivotal role even if it does not acquire AT&T Broadband, analysts said.
“AOL Time Warner has such a key role that if any discussions were to take place between AT&T and Comcast, they could only go so far before they would have to include them as a third party. AOL Time Warner will have some role to play in any deal that is made,” said one well-placed industry executive.
On the other hand, sources close to the companies say exploratory talks of the past several weeks have become more serious, and AOL Time Warner could hammer out an arrangement to acquire all or part of AT&T Broadband and AT&T’s other cable interests in short order. Both companies declined comment.
AT&T’s discussions with AOL Time Warner have been more serious than with any other prospective suitors for its cable systems, which until several weeks ago Ma Bell stalwartly insisted were not for sale.
Comcast Corp.’s rejected $58 billion stock and debt bid for AT&T Broadband changed all of that, and now, ironically, Comcast has been completely shut out of the sale dialogue.
There have been no discussions between the two companies since the Comcast offer was made earlier this month. AT&T said at the time it rejected the offer on price and governance issues, leaving the matter in Comcast’s court. For now, AT&T considers the Comcast matter closed unless the offer is sweetened.
However, Comcast still considers its original “fair and full” bid as still being on the table. At the time of AT&T’s rejection, Comcast President Brian Roberts said he is “prepared to hold immediate discussions with AT&T regarding our proposal.”
Although Comcast is aggressively working to win the support of powerful institutional shareholders who own stakes in both companies, Comcast currently runs the risk of being shut out of an AT&T bidding brawl it otherwise could have a hand in and even guide, sources said.
Sources close to AT&T said the company is looking at several informal verbal and written proposals from other companies. Sources said one of those proposals is from Cox Communication. However, both Cox and AT&T declined comment.
One source close to AT&T also said that “the review process could take months, not weeks.”
Although Comcast declined comment, sources close to the company said there are no plans to improve the original offer and conceded the company is “isolated” from AT&T’s wide-reaching sale discussions.
Comcast has moved up its scheduled quarterly earnings report to Aug. 1, when it could announce changes to its AT&T offer such as a stock collar range for Comcast’s trading price, more money per subscriber or plans to acquire AT&T’s troubled Time Warner Entertainment and Cablevision stakes-which could be flipped to AOL Time Warner.
Comcast could attempt to align such media players as AOL Time Warner as a strategic partner in its bid in exchange for agreeing to access and other considerations. But those talks are not being conducted, and for now Comcast still is going it alone.
“I don’t know what Comcast could do that would be pre-emptive and constructive at the same time,” said a source close to the company. “It’s almost like there needs to be a competing bid to respond to.”
Over at AOL Time Warner, sources said there are factions that disagree over whether Time Warner’s cable systems should be spun off into a separately traded entity that would be merged with AT&T Broadband. Such a spinoff is the only way such a merger could occur tax-free or with any hope of passing regulatory scrutiny, industry experts said.
AT&T shareholders would own a majority of the combined cable company, over which AOL Time Warner would have operational control.
While AOL Time Warner would clearly prefer to move on AT&T Broadband alone, it would do so by separating itself from the $7 billion in annual revenues and more than one-third of overall cash flow that comes from AOL TW’s cable systems.
Just last week, AOL Time Warner CEO Gerald Levin reiterated his long-held view that controlling cable’s broadband pipe into homes is the real source of industry power.
“When it finally is close to having all of its cable systems fully upgraded, why would AOL Time Warner want to get involved again in the several-year process of having to upgrade AT&T’s cable systems?” said Christopher Dixon, analyst at UBS Warburg.
Despite the genuine interest from other companies-and what still could be competitive bids from any of them-AT&T Broadband’s fate most likely is in the hands of Comcast and AOL Time Warner. None of the companies involved in the AT&T Broadband dance would comment.