Comcast’s Disney Bid Is For Real

Feb 16, 2004  •  Post A Comment

Comcast Corp. is seeking and getting the support of Pixar Animation chief Steve Jobs and other key allies who can supercharge the cable operator’s initial $66 billion hostile bid for The Walt Disney Co., which has quickly morphed-at least for now-into a potential clash of media titans.
In meetings with key institutional shareholders and bankers in New York, Boston, Denver and Los Angeles last week, Comcast CEO Brian Roberts made clear he will be patient and wait out the firestorm he set off with his long-anticipated bid.
“When you are doing something like this, you have to try and find a sweet spot to make people say I want this to happen because this is a good thing for shareholders,” Mr. Roberts said.
In the meantime Comcast officials, who assumed the same measured, savvy resolve in winning AT&T Broadband in a transforming deal in late 2002, are betting that the passage of time will see Disney’s accelerating stock price subside.
“What happens depends on where Disney’s stock is trading in a few weeks. We’re going to be thoughtful and patient. We’re going to remain sober and business-like,” said a high-level source close to the Comcast camp. “But we’re in this to win and we think we can.”
Mr. Jobs’ public endorsement of the proposed merger, and a stated willingness to work out a new partnership deal with a Comcast-owned Disney despite its recent break with its studio partner, would go a long way in securing support from Disney’s shareholders and board since the Pixar partnership has generated as much as half the Disney studio’s profits with hits such as “Finding Nemo” and “Toy Story.”
Comcast officials are unwilling right now to increase their original tax-free stock-swap offer valued at $26 a share to the low- to mid-$30-per-share range, as some on Wall Street say they must. Those officials privately insist they will not need to raise the offer in order to win Disney, well-placed sources said. However, there is consensus on Wall Street that the bid must be sweetened. Analyst estimates of Disney’s take-out value range from $31 to $35 a share.
At some point, it is not financially feasible for Comcast to close the widening gap between its falling stock price (down as much as 4 percent) and Disney’s rising stock price (trading at a high 19 percent premium to Comcast’s bid) since the ratio of shares swapped in the proposed deal would tip the majority ownership control to Disney shareholders, a condition to which Comcast’s controlling Roberts family would never agree, sources said. But Comcast also cannot afford for its stock to lapse into “deal limbo.”
“We will be disciplined and we will not overpay,” said Stephen Burke, Comcast Cable president. “We think it is unlikely there will be any other bidders. Otherwise we would not have launched this.”
Microsoft Corp., one of Comcast’s biggest shareholders, could contribute funds from its $54 billion cash hoard to entice Disney shareholders with a cash component if it becomes necessary to secure the deal. Microsoft will not wage a rival bid for Disney, well-placed sources said.
Comcast also is prepared but not eager to launch a consent solicitation provided by Disney’s by-laws, which would allow it to put a vote on its merger proposal directly to Disney shareholders.
“We’re not even thinking about that now. We don’t think that will be necessary,” said a high-level source close to the situation. The provision is one of many the Disney board adopted in recent years to improve its corporate governance and board independence. Such a vote also could be used to vote Disney Chairman and CEO Michael Eisner out of office and wipe Disney’s board clean, since members have no staggered terms.
talks predate offer
Comcast officials have had ongoing communications with independent members of Disney’s board that predate the Feb. 10 bid, well-placed sources said. Mr. Burke and other Comcast officials have been flooded with e-mails from senior executives at ABC News, ESPN and other major Disney operating units expressing their support for a Comcast takeover.
Mr. Roberts said Mr. Eisner’s flip refusal to consider or discuss Comcast’s takeover offer for Disney in a Feb. 9 telephone conversation between the two executives prompted Comcast to publicly launch its bid when it reported its year-end 2003 financials Feb. 10-the opening day of Disney’s analyst meeting.
“I spoke earlier with Michael Eisner, and it didn’t seem like it was going to happen any other way. We are trying to make this happen as friendly as possible, as quickly as possible,” Mr. Roberts said.
Analysts attending Disney’s annual two-day financial review at Disney World in Orlando, Fla., appeared divided on the merits of the proposed merger but far more unified on the notion that Mr. Eisner will be a casualty of the power struggle.
“His days are numbered,” said a prominent analyst, who pointed out that Mr. Eisner has projected a relaxed approach to the takeover bid and to efforts by disgruntled shareholder Roy Disney and groups such as the Institutional Shareholders Service to secure his ouster.
Before that occurs, Disney’s board of directors, led by independent Sen. George Mitchell, could move to replace Mr. Eisner with Disney President Bob Iger or an outside candidate.
“I’m not the slightest bit beleaguered. … The board is solidly behind the management of this company,” Mr. Eisner repeatedly remarked to small groups of analysts at the meeting, even though well-placed sources said behind-the-scenes he was making personal pleas for support to the likes of Time Warner Chairman Richard Parsons and IAC Chairman and former ABC colleague Barry Diller. They declined comment.
Disney could make a defensive acquisition, buying satellite provider EchoStar Communications, more duopoly-friendly television stations (such as Young Broadcasting’s KRON-TV in San Francisco) and cable networks (such as Liberty Media’s Discovery Communications). That would increase Disney’s debt from its current level of nearly $12 billion, sources said. It also could spin off ESPN, valued at $20 billion, as a way of keeping it out of Comcast’s hands. Such options are being explored by Goldman Sachs and Bear Stearns, whom Disney has hired to provide valuations to assess Comcast’s bid. The Disney board has promised the bid will get “fair and thorough consideration.”
At one point, Mr. Eisner joked that Disney could even seek to buy Comcast, which has an $80 billion market value. If he resigned, Mr. Eisner would leave with more than $123 million in deferred salary, bonus and stock options, sources close to the company confirmed.
High-level sources close to Comcast say the company is convinced there is no “white knight” or rival suitor with the financial resources and regulatory free rein to buy Disney. General Electric (which owns NBC and is closing on its acquisition of Vivendi Universal Entertainment), Viacom and Time Warner all have indicated they would be interested but their hands are tied. Viacom and NBC own major broadcast TV networks and are prohibited from buying a rival. Time Warner is prohibited from issuing stock in a deal while continuing to undergo a Securities and Exchange Commission investigation of AOL accounting indiscretions. Antitrust regulations would prevent Time Warner from owning two big Hollywood studios.
Sources close to Comcast say a major reason it must complete this deal is because even with its scale economics, it has been unable to control or sufficiently reduce the cost of potent programming which it must have for its digital video and high-speed data services. The biggest problem now facing Comcast can be resolved by the passing of time, and that is the rise in Disney’s stock price, which, as it turns out, is the company’s best takeover defense.
Analysts attending Disney’s two-day financial review in Orlando conceded that some of the bump in Disney’s stock last week was in response to the company’s posting much better-than-expected quarterly results, which were boosted by many factors, including the DVD sales of hit movies that will not be sustainable.< br>“Our bid, and all we can bring to the table, and all we can create together as a merged company is going to look pretty good to the Disney board and Disney shareholders,” said a high-level source close to Comcast. “And Michael Eisner is out.”
low-profile approach
The nation’s largest cable operator is taking its customary low profile, shying away from long, bold public and press comments. But high-level industry sources who know the players well say Philadelphia-based Comcast has all the negotiating cunning, business savvy, motivation, key support and financial wherewithal to get this deal done. “They never launch an effort like this they know they can’t finish. They will win this one,” said a high-level source close to Mr. Roberts.
While Mr. Roberts and Mr. Burke-a 12-year veteran of Disney who, like 25 other top executives, exited the company in the past decade with disdain for Mr. Eisner-most certainly want Disney and its embattled chairman as trophies, they would never say that publicly.
In the weeks leading up to Disney’s March 3 annual shareholders meeting in Philadelphia, Mr. Roberts, Mr. Burke and others, such as Comcast Treasurer John Alchin, are expected to call on Washington legislators, Mr. Jobs and other key allies who will be willing to openly voice their support for a Comcast takeover. What Comcast wants, and is likely to get, is Mr. Jobs saying on the record that he will work to secure with Comcast a continuation of his successful partnership with Disney, which recently fell apart.
“We have reached out to him and Mr. Jobs has reached out to us, and he is leaning towards working with us,” said a high-level source close to Comcast. Mr. Jobs could not be reached for comment.
Comcast also is betting that more program licensers and distributors will continue to break ranks with Disney, as Starz Encore did recently with a lawsuit. Cox’s ESPN contract is in jeopardy.
One player that will not be joining Comcast’s cause is a group headed by dissident shareholders Roy Disney, a former Disney vice chairman, and Stanley Gold, his financial adviser.
A source close to Comcast said the two are attempting to maintain a “friendly” posture with Disney’s management and board, and Mr. Disney and Mr. Gold have an adversarial break with Disney’s board in challenging Mr. Eisner’s reign and management of the company.