Comcast, AT&T try not to blink

Jul 23, 2001  •  Post A Comment

The bidding for AT&T Broadband is fast becoming a game of chicken.
Comcast Corp. officials are sitting tight on their unsolicited $58 billion stock and debt offer, which was unanimously rejected by the AT&T Corp. board last week over issues of price and governance.
Comcast is working to build support for its bid among its top 25 major institutional investors, most of whom also own AT&T stock and have told the company they would support the proposed merger, sources said. Those major institutional investors say they are not concerned about Comcast’s Roberts family having voting control of the merged entity. Comcast and AT&T declined comment.
Meanwhile, AT&T Broadband plans a meeting with investors Tuesday to make the case for its independent future as an AT&T tracking stock, plans for which were put on hold last week while AT&T Corp. studies its options, including other possible cable bids.
Sources say AT&T could make a surprise move Tuesday by presenting a counterbid or a new strategic partner to endorse to participate in the broadband unit’s independent operation.
AT&T Broadband President Dan Somers told Electronic Media the reason for Tuesday’s conference is “a deeper review of our second-quarter results and our expectations for the business. That’s all I’m going to comment on.”
Sources say AT&T Broadband will attempt to demonstrate how it can improve its operating margins on its own, which likely would draw criticism from Comcast and some major investors.
“They’ll [AT&T] try to pull out every bullet they can find-they have to-and maybe even a surprise or two along the way,” said a source close to the companies.
AT&T Corp. will announce its second-quarter earnings after the market closes Monday and could elaborate then on its exploration of other financial and strategic broadband options.
Sources close to Comcast said the company is prepared to conduct discussions with the likes of AOL Time Warner, Microsoft Corp. and other cable operators who could become strategic partners in its bid for AT&T Broadband and who have strategic bargaining chips of their own to cash in for a piece of the action.
However, for now Comcast is staying pat and attempting to go it alone with its original bid. “We’re not going to bid against ourselves. We’re waiting to hear from [AT&T]. There’s nothing to respond to. [AT&T] has only said it wants more,” said one insider. “But I don’t think it’s wise for AT&T to think that we’ll just leave this out there indefinitely.”
Although AOL Time Warner last week seriously considered making a bid for AT&T Broadband, top officials there concluded that such a move would attract stiff regulatory challenge.
Another long and tedious regulatory review could stymie AOL Time Warner’s expansion and growth plans in broadband, digital cable, Internet and international areas, sources close to the company said.
A combined AOL Time Warner and AT&T Broadband “would be so powerful, it would bring on a full-court press from the broadcasters, phone companies, the ISPs and the satellite companies,” analyst Blair Levin of Legg Mason said in a note to clients last week. “The other cable companies-and particularly the cable programmers-would not be supportive and might be quietly in opposition.”
The only way an AOL Time Warner bid for AT&T Broadband might work is for the former to agree to spin off all of its cable systems into a separately traded entity-an option that AOL Time Warner Chief Executive Gerald Levin continued to strongly oppose last week. Sources say AOL Time Warner Chairman Steve Case has been willing to consider such a move even though the cable systems contribute considerable cash flow to the parent corporation and provide the digital-cable lifeline for potentially lucrative emerging new services.
Mr. Levin last week said AOL Time Warner will not comment on its plans or activities regarding AT&T and Comcast.
“To get the deal done, AOL Time Warner would have to agree to some kind of nondiscriminatory treatment of non-AOL Time Warner properties,” Legg Mason’s Mr. Levin said. “Such a condition would lead to protracted government micromanagement of AOL Time Warner’s business negotiations … and the devaluing of the very synergies upon which AOL Time Warner sold its original merger to Wall Street.”
While AOL Time Warner has the financial muscle to make a bid for AT&T cable, it can get what it wants by leveraging its other assets, sources said.
Comcast Corp. officials will be looking for ways to shorten the process and reduce the number of competitive bidders. However, sources close to Comcast concede it eventually may need to sweeten its bid and bring in supportive partners. Comcast has received numerous inquiries from interested parties, sources said.
The most likely improvements would include a “collar” near the original bid of $58 billion-reflecting the price of Comcast stock at the time-which would ensure AT&T shareholders value by setting a trading range for Comcast issues.
Comcast also could offer to use equity and debt to acquire AT&T’s 25 percent stake in Time Warner Entertainment and 36 percent stake in Cablevision Systems. Both stakes could immediately be flipped to AOL Time Warner.
Sources close to the company say Comcast is not as eager to alter its proposed governance structure, to which AT&T’s board last week specifically objected. Comcast proposed that its controlling Roberts family would have a reduced 46 percent stake in the merged company, although it still would be the single largest voting shareholder and have management control. The board also said it did not think Comcast’s offer reflected the full value of its broadband assets.
Tom Wolzien, analyst at Sanford Bernstein, said none of the large AT&T institutional investors he has talked to view governance as a concern. “We expect AT&T to drop its requirement for a significant change in Comcast’s voting structure before they cause negotiations to grind to a halt,” Mr. Wolzien said.
However, the bidding for AT&T Broadband could quickly shift into a high-stakes game of chicken.
As AT&T’s stock drifts higher on the anticipation of a bidding war, the telephone giant gains more clout in holding out for more money and conditions. The stock of the largest cable operator gained more than 20 percent last week to trade at more than $21 a share, adding $14 billion in shareholder value. Some AT&T investors have said they think the broadband unit could reap as much as $70 billion.
AT&T’s review of all of the strategic and financial options for its broadband unit, including pursuing the tracking stock spinoff it has placed on hold, could drag out the process for months.