AT&T; Deal to Create Cable Giant

AT&T; Corp. agreed Wednesday to sell its cable television business to Comcast Corp. for $52 billion, in the process creating a cable giant double the size of its biggest rival, AOL Time Warner Inc.

With 22 million subscribers, the new company, AT&T; Comcast Corp., would be bigger than any of the nation’s cable or satellite providers, reaching one of every four pay television households.

AT&T; Comcast would assume about $20 billion in debt from AT&T;, which has been crippled by heavy borrowing during a $120-billion cable buying spree over the last three years.

Comcast’s victory marks the continuing rise to power of Brian Roberts, the 42-year-old billionaire president of the nation’s third-largest cable operator.

Comcast was considered by many on Wall Street to be a dark horse to win the bidding contest because of Roberts’ hostile, $41-billion offer in July to acquire the AT&T; Broadband unit, the nation’s largest cable operator. That offer was rejected by AT&T;’s board, but the company then put the cable business up for sale, prompting a bidding war among Comcast, AOL Time Warner, Cox Communications Inc. and Microsoft Corp.

After four months of intense jockeying by three bidders, AT&T;’s board voted unanimously Wednesday in favor of the Comcast proposal. The vote was announced after the stock market closed.

It was a sweet victory for Roberts, who was beat out by AT&T; two years ago in a bid for cable operator MediaOne Group, which formed the foundation of AT&T;’s cable business.

The Comcast sale also helps preserve the image of beleaguered AT&T; Chairman C. Michael Armstrong, whose leadership has been called into question by Wall Street because of the sinking performance of the company’s long-distance and broadband operations. AT&T;’s stock price has lost two-thirds of its value under Armstrong, who had been in favor of keeping AT&T;’s cable business in hopes of salvaging his legacy by turning the unit around.

Under the deal with Comcast, Armstrong, 63, would become chairman of the new company instead of staying on at AT&T; until May 2003.

Roberts would be chief executive of the new company, which would be based in Comcast’s hometown of Philadelphia, and his family would have the largest block of stock.

The deal, which must be approved by regulators and shareholders of both companies, should not face significant hurdles. The deal does not appear to violate any current rules, and Federal Communications Commission Chairman Michael Powell would like to eliminate many media regulations to encourage more consolidation.

The transaction also could be a defining step in the dismantling of AT&T.; The deal calls for the telecommunications giant to spin off the cable unit and merge it with Comcast. AT&T; shareholders would own 66% of the voting shares in the new company, with the Roberts family owning 30%.

AT&T; already has spun off its valuable wireless business to investors and said it will proceed with plans to spin off its ailing consumer long-distance business.

A merger of the nation’s largest and No. 3 cable companies continues a decade-long consolidation in pay television, spurred by the deregulation of the cable, satellite and telephone businesses.

Roberts and his father, Ralph, who co-founded Comcast, are one of the few pioneering cable families still in the business as a wave of new investors, such as Microsoft, computer billionaire Paul Allen and AT&T;, fueled a merger frenzy in the past decade.

Analysts say the Comcast-AT&T; deal also could spur another round of bidding for cable properties among the six major remaining cable rivals. Last month, cable TV mogul Ted Turner predicted that in a few years there would be only two or three cable companies.

For consumers, fewer cable companies may have little effect on rates because the primary competitors are satellite TV operators, such as DirecTV and EchoStar Communications Corp. But EchoStar’s planned merger with its only rival, DirecTV, could eliminate a national competitor, affecting pay TV rates. However, the Comcast deal is likely to help EchoStar’s chances with regulators, said executives at the two satellite companies.

In recent years, Armstrong spent heavily assembling a cable TV empire in an effort to diversify AT&T; in a costly effort to provide phone, data and video services over cable TV lines.

But analysts say AT&T;’s declining financial performance and the faster-than-expected erosion of its core long-distance phone business made it vulnerable to a breakup. The company also stumbled badly as its cable expenses soared, and cut its profit margins from an industry average of 40% to less than 20% in two years.

AT&T;’s poor showing in the cable field invited the unsolicited bid this summer by Comcast, which promised that it could easily improve profit by halting AT&T;’s telephone expansion and using its expertise in cable operations.

Many of the AT&T; management and board members were insulted by the first Comcast proposal, which would have given the Roberts family 45% of the voting control even though the family owned only 2% of Comcast’s stock.

In an effort to blunt Comcast’s offer, AT&T; stunned Wall Street this fall by firing its cable chief and installing a seasoned management team.

Armstrong was adamant about keeping AT&T;’s cable business independent and was backed by board member Amos Hostetter, a cable pioneer who was instrumental in recruiting the new cable managers.

But this fall, AT&T;’s largest investors began pressuring the company for a cable sale, tired of the stock slump under Armstrong and doubtful that the new team could turn things around.

Cox Communications, which like Armstrong also aggressively pursued phone business over cable lines, seemed to become AT&T;’s white knight. But Cox is only the nation’s fifth-largest cable operator, about half the size of AT&T;, and Wall Street viewed Cox as a longshot.

AT&T; apparently dismissed the AOL Time Warner bid as too risky because of the long and hard regulatory review it would have faced. A merger would have made the company the nation’s leading cable operator, largest Internet service provider and biggest producer of entertainment content.

The wild card in the bidding, however, was Microsoft. The software giant agreed to back either Cox or Comcast with cash to keep its chief rival, AOL Time Warner, from winning.

Microsoft was worried that cable operators would not carry its MSN Internet service over high-speed networks if AOL became the biggest cable operator, with 25 million homes. Microsoft also was concerned that it would not get a chance to put its operating system into cable set-top boxes.

Now that Comcast has won, Microsoft has agreed to convert $5 billion of debt it held in AT&T; into equity in the new cable company.

Roberts even softened his stance toward the telephone business, to the dismay of some investors who had counted on Comcast to rein in expensive investments in that area.

“That’s peace-pipe talk,” said Scott Cleland, telecommunications analyst at Precursor Group, an independent research group. “The real deal is that if AT&T; Broadband brings their strategy [of cable telephony], then investors will gag.”

AT&T; Broadband is the largest cable operator in Los Angeles, where it serves about 500,000 customers.

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Times staff writer Elizabeth Douglass contributed to this report.