AT&T’s talks could be risky

Aug 13, 2001  •  Post A Comment

AT&T Chairman Michael Armstrong’s search for strategic equity partners or a counterbidder to Comcast Corp. for its AT&T Broadband unit could be a risky exercise.
While Mr. Armstrong last week met separately with Disney and Microsoft officials on the West Coast, Wall Street investors and analysts warned that a prolonged shopping process or the layering on of conditional strategic partnerships could jeopardize the broadband unit’s valuation and Comcast’s interest in buying it.
“AT&T could be giving away the upside in its broadband business,” said one source close to the situation.
For instance, Disney could agree to take a 20 percent stake in a spun-off AT&T Broadband entity to which it could contribute its noncontrolling stakes in leading cable networks such as A&E, Lifetime and E! Entertainment, which are collectively valued by analysts at $5 billion. It is unclear whether Disney’s partnership pacts in those services allow it to leverage its stakes in such a manner.
However, Disney also would likely require that it get two or three analog channels on AT&T cable systems for new services it creates and carriage agreements for its existing product, well-placed industry sources said.
Disney is less likely to invest cash in or to bid to acquire all of AT&T Broadband, having just announced its $3 billion acquisition of Fox Family International, sources said.
Bringing in a strategic investor like Disney might help AT&T secure more institutional investor support for its postponed spinoff of AT&T Broadband, but it would not help to raise cash to reduce AT&T’s still formidable debt.
Microsoft, which already has invested $5 billion in AT&T Corp. and $1 billion in Comcast, could similarly condition any of its support with carriage of its programs or software on AT&T cable systems.
Sources said Microsoft is keeping its “foot in the door” to be ready to throw its financial and strategic support to Comcast if AOL Time Warner makes a bid to acquire AT&T Broadband.
An AOL Time Warner bid for AT&T Broadband would spark a “major food fight” among cable’s biggest players, said one executive close to the situation. “Comcast, Microsoft, Disney and others would all be in there trying to block it,” the executive said.
AOL Time Warner, which is considered the only plausible prospective counterbidder for AT&T Broadband, could condition any support it gives to AT&T on AT&T’s long-term carriage of its AOL Internet service and Warner Bros. content, which could also include two to three new analog channels, sources said. AOL Time Warner also could seek to acquire AT&T’s stakes in Cablevision Systems and Time Warner Entertainment.
Such concessions, while serving the interests of suitors, could mortgage the future and valuation of AT&T Broadband, Wall Street sources said.
“If Comcast thought AT&T Broadband was worth $58 billion, according to its original stock and debt bid, the valuation has to diminish if suddenly Comcast or any other buyer is saddled with long-term carriage agreements AT&T made just to take on a strategic investor or two,” said one investment banker who asked not to be identified.
Cablevision’s move last week to allow the open sale of AT&T’s stake in the company, while an expected and necessary technicality, also could throw a wrench into AT&T’s plans to sell its broadband assets at a maximum price.
Although AT&T is now free to sell its Cablevision stake, so is Cablevision.
Cablevision declined comment on whether it is having discussions with AOL Time Warner, Comcast, John Malone’s Liberty Media or others in acquiring AT&T’s stakes in Cablevision and its stand-alone program subsidiary, Rainbow Media Holdings.
Doing so could eventually lead to the wholesale buyout of Cablevision, whose Chairman Chuck Dolan has always maintained that the family-controlled company is for sale “at the right price.” But the sale of AT&T’s nearly one-third nonvoting stake in Cablevision out from under AT&T also could undermine AT&T’s ability to use its stakes in Cablevision and TWE as valuable bargaining chips.
For instance, Comcast has offered to use equity and cash to acquire AT&T’s Cablevision and TWE stakes, which it would then flip to the most likely buyer, AOL Time Warner. However, that was not part of Comcast’s original $58 billion bid for AT&T Broadband.
The longer AT&T beats the bushes for bidders and strategic partners, the greater the risk that its stock price drifts lower and its broadband valuation declines. Both AT&T and Comcast stock prices have drifted lower since AT&T’s board unanimously rejected the offer.
Mr. Armstrong has until around Labor Day to report back to AT&T’s board on his ability to flesh out counterbids or strategic equity investors for a spun-off broadband unit, sources said.
If AT&T opts to continue with plans to spin off its broadband unit, or to sell to another party, Comcast has said in recent Securities and Exchange Commission filings it is prepared to put its buyout offer directly to an AT&T shareholder vote.
Analysts said Comcast shareholders face dilution if Comcast’s stock price continues to be depressed and if the company is forced to improve its bid for AT&T Broadband.
“If AT&T drags this out through the end of the year, they run the risk of not getting what the board is really looking for, which is maximum shareholder value for its broadband assets,” said an executive close to the situation.
Bankers have valued an AT&T Broadband spinoff at around $40 billion.
Sources close to the situation said John Malone and his Liberty Media Corp., which was completely split off from AT&T Corp. on Friday, have yet to surface in support of Comcast or other parties. In fact, Mr. Malone has been aggressively selling shares of AT&T, in which he remains a major investor.
“The sale of his AT&T shares may be an indication John thinks AT&T stock has topped out, that there will be no bidding war and that this thing could deteriorate the longer AT&T waits to hammer out a Comcast deal,” said a major investor.