Comcast Drops Out of Bidding for MediaOne

Comcast Corp. agreed Tuesday not to make a counteroffer for MediaOne Group Inc. in a complicated settlement with its rival in the bidding, AT&T; Corp., that all but assures the phone giant’s acquisition of the cable company.

As an incentive to Comcast for bowing out of the bidding, AT&T; agreed to sell Comcast $9 billion in coveted cable systems that serve about 2 million customers.

The announcement by the companies late Tuesday night did not specify how many of those systems are part of MediaOne, which accepted AT&T;’s stock-and-cash offer of $56 billion on Saturday. But sources close to the negotiations said Comcast, which had until Thursday to make a counter-bid, would end up with roughly 40% of the MediaOne subscribers it sought to gain in its original merger agreement with the nation’s third-largest cable operator, reached in late March.

AT&T; sources said the sale will help the company defray the cost of acquiring MediaOne while securing Comcast as a joint-venture partner in the phone company’s effort to establish a national brand for local phone service using cable wires.

The nation’s largest cable operator, Time Warner Inc., has already signed such a pact with AT&T.; Adding Comcast and MediaOne to the mix would allow AT&T; to offer phone service to roughly 68 million homes.

By selling systems to Comcast, AT&T; could also relieve some antitrust pressures. The MediaOne purchase, which must be approved by shareholders and federal regulators, would give AT&T; direct or indirect ownership of systems that reach about 62% of American homes, surpassing Time Warner as the nation’s largest cable operator.

Although no federal laws now preclude that level of market dominance, consumer advocacy groups have already vowed to file a petition with the Justice Department opposing the merger on antitrust grounds. Analysts had doubted Comcast’s ability to top AT&T;’s cash-rich bid and were surprised by the measures taken by AT&T; to keep peace in the cable industry and accommodate Comcast. The phone company even went so far as to acquire control of another cable company to satisfy Comcast’s demands.

In a surprise development late Tuesday, AT&T; announced the purchase, for about $2.2 billion, of the remaining 50% of Lenfest Communications Inc. that it does not own. Comcast has long coveted control of Lenfest, but the company’s founder, Gerry Lenfest, has refused to sell to the Roberts family that controls Comcast.

But as part of its deal with AT&T;, sources said, Comcast would gain an option to purchase, within three years, Lenfest systems that serve about 1.2 million subscribers.

Lenfest, which serves 1.5 million subscribers, owns cable systems in Philadelphia, where Comcast is based, and in other parts of Pennsylvania and New Jersey that fit tongue-and-groove with Comcast’s own operations.

In addition, analysts said Comcast and AT&T; have agreed to swap about 700,000 subscribers to give each other bigger concentrations of customers in their key markets. AT&T; will take over Comcast systems in Chicago; Sacramento; Richmond, Va.; and south Florida. Comcast will take over AT&T; systems in Baltimore and north Florida.

Analysts said Comcast is getting a sweetheart deal, paying about $4,400 per subscriber for systems that AT&T; is spending $4,800 to buy from MediaOne. What is more, Comcast will defray some of the $9-billion purchase by using a $1.5-billion penalty fee MediaOne must pay it to terminate their earlier merger deal.

MediaOne on Saturday accepted AT&T;’s offer, deeming it superior to Comcast’s earlier all-stock bid, valued at Tuesday’s market close at $46.6 billion.

Under its original merger pact with Comcast, MediaOne gave other bidders until Wednesday to enter the contest and gave Comcast five days to respond to any counteroffers. Comcast faced a Thursday deadline to counter AT&T;’s bid.

Microsoft Corp. and America Online Inc. had each signed confidentiality agreements with MediaOne to assess whether to join the bidding. But sources say neither could justify the potential cost.

Competing long-distance company MCI WorldCom, which was rumored on Monday to be interested in backing Comcast’s bid, was never a serious contender, sources said.

Wall Street seemed unconvinced of a bidding war, driving down MediaOne’s stock $2.06 to close at $77.63 a share on the New York Stock Exchange. AT&T;’s shares rose 50 cents to close at $51.56, also on the NYSE, and Comcast shares fell $1.81 to close at $64.13 on Nasdaq.

Microsoft, an investor in Comcast with plenty of cash to help take on AT&T;, will get a larger role in supplying software for the advanced set-top TV boxes the phone giant is rolling out later this year.

Under an agreement with AT&T; that could be announced as early as today, sources close to the negotiations said, Microsoft will also buy MediaOne’s 30% interest in Telewest Communications, Britain’s No. 2 cable company, with an estimated market value of $2.8 billion.