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AS COMCAST GAINS FINANCIAL STRENGTH, IT WEIGHS OPTIONS

Jul 28, 2003  •  Post A Comment

Although Comcast Corp. could still enter the Vivendi Universal Entertainment auction, the leading cable operator is more likely to begin making big content plays with AOL Time Warner, high-level sources said.
In a recent meeting with Vivendi Universal Chairman Jean-Rene Fourtou, Comcast executives said they are considering making a bid, although the company has not yet conducted due diligence on VUE’s financial records. Comcast and Vivendi declined comment.
Well-placed sources said if Comcast were to become an eleventh-hour bidder, it would most likely act alone, even though it has been approached by active VUE bidders John Malone’s Liberty Media Corp. and Viacom about a joint offer.
The possibility of acquiring VUE’s USA, Sci Fi and Trio cable channels and its Universal Studios is a rare and valuable opportunity that even conservative Comcast-a new player of scale struggling with spiraling content costs-can’t resist. Mermigas on Media and TelevisionWeek first reported Comcast’s consideration of a VUE bid on July 9.
Sources said Comcast’s current quandary, moreover, is in not being familiar with how to value or manage such creative properties and that Comcast has solicited its regular financial advisors for assistance.
Comcast is restricted by Morris Trust rules from making any all-stock deals until late 2004, but could offer Vivendi a combination of cash, stock and a minority equity stake. One scenario calls for the creation of a stand-alone subsidiary that would be majority-owned and -controlled by Comcast and would encompass all of VUE and all of Comcast’s wholly owned cable networks (such as The Gold Channel) and partial stakes (such as in E! Entertainment), sources said.
Having reduced its strapping debt to under $20 billion and accelerated the upgrade of the AT&T Broadband systems it acquired late last year, Comcast now has more financial flexibility and willingness to consider big deals again, said one insider. Although the next round of VUE bids are due at the end of July, Vivendi could extend deadlines just to keep the bidding intensely competitive, sources said.
“We are a very long way from doing anything about this,” said one insider. “If this was high on Comcast’s list of priorities, it already would have been done by now. But there are not many companies in this space, so how could the company not look at it? Anything is still possible.”
Still, high-level sources close to the situation said that by working with AOL Time Warner, Comcast may be able to begin making the big plays for key content ownership and control that it needs to make the most of its dominant 21 million cable subscriber base. One indication that Comcast is preparing for such content moves is that it has stepped up its search for an industry veteran for the new post of programming president, reporting directly to CEO Brian Roberts, sources said.
One option already being set in motion is for Comcast to cash in its 21 percent stake in Time Warner Cable and two separate cable partnerships involving systems in Texas and Missouri, an option valued at about $10 billion. I have learned that Comcast recently informed AOL Time Warner that it intends to formally exercise its right to force a sale of the cable unit to cash out. Although Comcast is attempting to exercise this right in a friendly way now, the company soon plans to trigger this process in a formal written notification to AOL Time Warner, high-level sources said.
Sources said the companies have not yet begun detailed negotiation.
AOL Time Warner’s hands are tied because it is prohibited from proceeding with its planned sale of a public cable spinoff while the Securities and Exchange Commission, whose clearance is required for such an offering, continues its probe of accounting irregularities at the America Online unit primarily.
In a July 23 second-quarter earnings call with analysts last week, AOL Time Warner Chairman Richard Parsons alluded to the company’s discussions with Comcast and reiterated that the cable initial public offering would be driven more by strategic imperatives than by the need to generate more debt reduction funds. AOL Time Warner has sold more than $4 billion in assets so far this year to bring its debt down to nearly $24 billion but would still be prohibited from paying off Comcast in all cash for its 21 percent cable stake.
Comcast would more likely accept a combination of cash and select Time cable systems that will help to expand its existing cable clusters, sources said. Comcast also could seek a minority ownership stake in any of AOL Time Warner’s premiere cable networks or program production operations. One scenario would call for the companies to create a new subsidiary in which they would combine their existing and future wholly and partially owned cable and broadcast networks.
Another option would be for Comcast to negotiate favorable long-term carriage licensing agreements for the Turner cable networks, HBO, CNN and other cable networks owned by AOL Time Warner. It also could negotiate program and production alliances with Warner Bros. That would provide it with competitive access to content.
While such considerations would be only part of any settlement to cash out its TWC stake, it would begin to provide Comcast with more cost-effective access to key content. In the past six months, Comcast has battled cable networks for, and already won, $270 million in reductions in the affiliate license fees it pays based on the newfound scale it is delivering.
ESPN continued to be a major holdout in that process. But well-placed sources told me that Comcast may be aided in its 10 percent across-the-board reductions of all cable license fees by smaller but more vocal operators-including Cox Communications, Cablevision Systems and DirecTV-whose ESPN carriage agreements expire late this year and early in 2004.
While Comcast is prohibited by contract terms from forcing ESPN programming to paid tiers midway through its ESPN contract, Cox and other operators are threatening such a move when their pacts expire as a means of countering ESPN’s imposed 20 percent rate hikes, sources said.
It is at the center of that intensified tug of war between content suppliers and distributors this year that Comcast has realized that it must leverage its distribution scale to gain a bigger content foothold. It has long been speculated that acquiring the struggling Walt Disney Co. will be the ultimate solution. However, sources close to Comcast say that offer would have to be a friendly combination of cash and stock, and concedes that it could come sometime in 2004.
It appears that Comcast has peers such as Disney’s ESPN and AOL Time Warner in positions in which it has the upper hand, for now. Comcast has demonstrated it is savvy enough to use that timing and circumstance to its advantage.