Comcast Bids for AT&T; Cable

In an audacious attempt to become the nation’s largest cable operator, Comcast Corp. made an unsolicited offer Sunday to buy AT&T; Corp.’s cable business for $44.5 billion in stock plus the assumption of $13.5 billion in debt.

Merging the third-ranked cable company with industry leader AT&T; Broadband would create a television behemoth that would reach 22 million of the nation’s 100 million households, including more than half a million in Southern California. The deal would be the second-largest cable transaction after AT&T;’s $60-billion purchase of MediaOne Group two years ago.

The deal also would push Philadelphia-based Comcast ahead of rivals AOL Time Warner--the nation’s No. 2 cable operator with 13 million customers--and DirecTV, the leading satellite TV provider, which has 10 million subscribers. AT&T; Broadband has 13.5 million cable subscribers.

Racked by a declining long-distance business, weak earnings and a slumping stock price, AT&T; said its cable business is not for sale. The telecommunications giant plans to create a “tracking stock” for its AT&T; Broadband unit later this year and spin it off into a fully independent company next year. The proposed spinoff is part of a broad restructuring to split AT&T; into four parts.

Comcast’s bid is a direct appeal to investors in an attempt to pressure AT&T; management to consider the offer before a special shareholders’ vote this fall on making the broad-band unit a separate company.

In a letter dated Sunday to AT&T; Chairman C. Michael Armstrong, Comcast President Brian Roberts said that merging the two cable companies would be a better deal for AT&T; shareholders than AT&T;’s planned spinoff of the unit. Roberts said in the letter that several months of unfruitful talks prompted the offer.

“We’re trying to accelerate AT&T;’s own plan to break itself up,” Comcast Cable President Stephen Burke told The Times.

AT&T;’s resistance could set in motion a bitter battle between the two companies, according to industry analysts. “AT&T; has no current plans to sell its broad-band business, including the transaction proposed [Sunday] by Comcast,” AT&T; spokeswoman Adele Ambrose said. “We will analyze the proposal and respond in due course.”

But some analysts said that Armstrong could be pressured by large institutional shareholders to accept the offer, which includes a hefty premium. One investor said that, given AT&T;’s disastrous record as a cable operator and Comcast’s strong financial performance, shareholders could push for the deal.

In recent weeks, amid continued speculation that Comcast would make a bid, AT&T; executives have reiterated that the unit is not for sale. At the cable industry’s annual convention in Chicago last month, Armstrong and AT&T; Broadband President Dan Somers told reporters that a sale was not in the picture. Even Roberts, who privately has made little secret of his interest in making a run at AT&T; Broadband, told reporters in Chicago that he did not anticipate making a major acquisition this year.

As a result, analysts were surprised by the timing of Comcast’s bid. Most experts had expected the company to wait until Wall Street had placed a value on AT&T; Broadband later this year.

Offer Is Likely to Be Rejected

It is unclear how events will unfold in the coming week, although Wall Street analysts eagerly were awaiting a Comcast conference call this morning. Sources close to the company said Roberts would begin pitching his proposal to AT&T;’s large institutional shareholders.

Industry experts and sources close to both companies predicted that AT&T; and its board would reject the Comcast offer and instead would pursue the proposed spinoff. Another AT&T; unit, AT&T; Wireless Services Group, begins operating as a separate company today.

Sources say Comcast approached AT&T; in October about buying the cable unit, but was rebuffed by Armstrong, who has bet his career on turning around AT&T; by building its cable business. Armstrong has made it clear inside AT&T; that he would like to run AT&T; Broadband once it is a free-standing entity.

Shortly after Armstrong joined the company, AT&T; spent nearly $100 billion on the back-to-back acquisitions of Tele-Communications Inc. and MediaOne Group. The former chairman of El Segundo-based Hughes Electronics Corp. envisioned offsetting AT&T;’s fast-eroding long-distance business by using cable systems to sell a host of telecommunications services, including local and long-distance phone, cable TV and high-speed Internet access.

But the company has been buffeted by the continuing deterioration of its core long-distance business, management turnover and difficulties operating the cable properties, which now have some of the lowest profit margins in the industry. The costs of upgrading cable systems for services such as telephone operations also were steeper than AT&T; had expected.

The stock fell from $63 a share in early 1999 to $16.90 in December 2000, and closed Friday at $22.24 on the New York Stock Exchange.

In what some on Wall Street saw as a stunning admission of defeat, AT&T; announced last fall that it would split itself up in an attempt to bolster its value on Wall Street. But the stock has hardly moved since, in what some experts say reflects the cool reception to the move by investors.

In addition to acquiring AT&T;’s cable systems for $44.5 billion, Comcast said it also was prepared to buy AT&T;’s sizable interests in two rival cable operators: a 30% interest in Cablevision Systems Corp., and a 25.5% stake in a Time Warner partnership that owns cable systems, Home Box Office and Warner Bros. studios.

Comcast said it was willing to buy the AT&T; cable business with 1.05 billion shares of its stock, which had a value of $44.5 billion based on its closing price Friday. It also would assume $13.5 billion in AT&T; debt.

Offer Put at 30% Over Estimated Value

Under the proposed deal, AT&T; shareholders would own 51% of Comcast, while the Roberts family, which has controlled Comcast for 35 years, would own 43%. Roberts would have effective control.

Analysts say Comcast’s proposed price, including debt, is 30% more than what many on Wall Street estimate AT&T; Broadband is worth. But Comcast says it would be able to recover some of the costs by operating the assets more effectively. While Comcast’s profit margins are 41%, AT&T; Broadband’s are only 16%.

Comcast and its ambitious 41-year-old president long have been eager to lead the industry. Through acquisitions, the company has doubled in size over the last three years, to 8.4 million cable customers. In early 1999, Comcast offered $58 billion for MediaOne, but lost a bidding war with AT&T;, which ended up paying Comcast a handsome break-up penalty fee. Comcast also owns professional sports franchises with its 76ers basketball and Flyers hockey teams.

The bid comes after an intense period of consolidation within the cable business, which has seen industry pioneers such as John Malone sell out over the last five years. The Roberts family, led by 81-year-old patriarch Ralph Roberts, is one of the few pioneers left among the seven surviving companies that now control 90% of the industry’s 70 million customers. The consolidation was driven by the billions of dollars in investment needed by the industry to compete against satellite television providers as well as local phone companies that have stepped into the high-speed Internet access and video businesses.