Investors in AT&T; Hear Comcast Call

TIMES STAFF WRITER

Even as AT&T; Corp. insists its cable business is not for sale, the company's battered shareholders were lining up Monday in support of Comcast Corp.'s unsolicited $41-billion bid.

Several of AT&T;'s largest investors said they would prefer a proven and highly successful operator such as Comcast in charge of the cable systems that have deteriorated under the telecommunications giant's ownership.

"AT&T; shareholders have not been rewarded for the money they've spent on cable," said Ann Miletti, associate portfolio manager of Strong Capital Management, which holds 1 million shares of AT&T; and nearly 2 million of Comcast. "We're not willing to take the risk of waiting for AT&T; management to turn around the systems when we can get a quick reward from Comcast."

In a preemptive strike to become the nation's cable leader, Comcast proposes to combine its third-ranked cable business with top-ranked AT&T; Broadband. The Philadelphia-based company, run by cable pioneer Ralph Roberts and his son Brian, would have 22 million subscribers, reaching nearly one in every four of the nation's 100 million households with television.

Comcast would become as big a player in the television subscription business as DirecTV, the satellite TV leader, and AOL Time Warner Inc., the No. 2 cable operator, combined.

AT&T; reiterated Monday that it has no interest in selling AT&T; Broadband, but would evaluate the Comcast proposal. The company also said it would proceed with its previously announced plans to spin off the cable unit as a publicly traded entity late this year.

Consumer groups Monday warned against the further concentration of power in the cable industry, but analysts agreed that the proposal would face low regulatory hurdles.

The Supreme Court earlier this year struck down cable ownership limits that prevent any company from reaching more than 30% of the nation's 85 million satellite and cable TV subscribers. Even with 22 million cable subscribers, Comcast would reach only 26% of all TV subscribers.

"There are regulatory issues, but no regulatory problems," said Blair Levin, an analyst at Legg Mason and a former Federal Communications Commission staffer.

A Comcast-AT&T; combination would deliver the first major test of the Bush administration's approach to mergers and antitrust enforcement in the cable and media industry.

"It will be a bellwether," said Scott Cleland, regulatory analyst at Precursor Group, an independent research group in Washington. "This deal will be watched carefully and could set the tone for how the Bush administration and Federal Communications Commission will handle mergers in the future."

Comcast's proposal highlights AT&T;'s expensive and ill-fated foray into the cable business just two years ago. In what could turn out to be one of the biggest corporate disasters of all time, AT&T;, under Chairman C. Michael Armstrong, spent about $100 billion on two back-to-back cable acquisitions to help offset the company's fast-declining long-distance telephone business.

But AT&T; stock has lost more than half its value in the last two years as earnings weakened, cable performance deteriorated, and investors lost faith in Armstrong's ability to turn around the ailing giant.

"AT&T; has destroyed more cable value faster than any company in the history of cable," wrote analyst Cleland in a report Monday. "Given AT&T; CEO Armstrong's disastrous track record in cable to date, most shareholders would prefer a proven cable operator to run AT&T; Broadband."

One of Comcast's biggest selling points to the AT&T; board is its superior profit margin. AT&T; Broadband's margin dropped to 18%, from the 40% range. Comcast's is 42%.

"The question is who would you rather have managing this thing?" said Tom Wolzien, an analyst at Sanford C. Bernstein & Co.

Analysts say Comcast's bid will take weeks or months to play out. Sources close to AT&T; said the board would meet within the next few weeks to review Comcast's offer. Comcast, meanwhile, has scheduled dog-and-pony shows with stops across the country over the next several weeks to pitch its proposal to reporters and institutional investors, to bring pressure on the AT&T; board.

Comcast and AT&T; had preliminary merger talks over the last several months, but they broke down over issues of control.

AT&T;'s board has been reluctant to give up ownership of the nation's largest cable network to a family that would have only a 2% equity interest in the combined operation. The Roberts family would retain effective control with 43% of the voting stock. AT&T; shareholders collectively would have 51% of the Comcast voting shares after the merger, but would not necessarily vote as a block.

On Monday, AT&T; said it would proceed with the planned spinoff of AT&T; Broadband. "Our current plan is to proceed with the restructuring that we announced in October," AT&T; said in a statement. Last fall, AT&T; announced that it would split the company into four parts to bolster its stock value.

The company completed Phase One when AT&T; Wireless began trading Monday as a separate company. Shareholders will vote in the next two months on whether to spin off AT&T; Broadband into a tracking stock late this year. A tracking stock allows investors to participate in the financial performance of a group of assets without offering any ownership rights.

Comcast's proposal could change the outlook for the spinoff. "Initially, I'd have to say no to the spin off," said Cengiz Searfoss, head of research at West Broadway Partners, a hedge fund with a significant position in AT&T.; "It will be hard to find many money managers that would turn down the Comcast offer."

Another money manager said AT&T; Broadband would have difficulty trading publicly at the multiple Comcast is offering today.

"I don't think they can get that kind of value, so I'm supporting the Comcast bid," said Adrian Davies, senior equity analyst at Federated Investment Management, which owns $31 million in AT&T; shares. "As a group, cable is trading at 15 times cash flow, so Comcast's offer of a 22 multiple is a significant premium."

The shares of a company proposing an acquisition generally decline, as Comcast's did Monday. Comcast Special Class A shares fell $2.98, or 7.1%, to $39.30 after dropping as low as $37.46.

The decline shaved the premium built into Comcast's stock-and-debt deal to $41 billion from $44.5 billion.

AT&T; shares rose $1.98, or 12%, to $18.70 on the New York Stock Exchange after climbing as high as $19.30 during the day.

The rise also reflected, as one cable executive put it, "the opening of the floodgates to other bidders."

Some large AT&T; shareholders speculated that cable mogul John Malone, who sold his controlling stake in Tele-Communications Inc. to AT&T; two years ago, would buy AT&T; Broadband.

"I'd be surprised if we didn't hear anything from Malone before this is over," said Searfoss.

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Times staff writer Edmund Sanders contributed to this report.

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Ups and Downs

AT&T; shareholders have had a wild ride since C. Michael Armstrong was named chairman in November 1997 and embarked on a restructuring of the telephone giant. He began building the company's stable of cable television properties soon after taking office.

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AT&T;, quarterly closes and lastest

Monday: $18.70, up $1.98

Source: Bloomberg News

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Cable Subscribers

Here are the top cable operators as of the beginning of 2001. Together AT&T; and Comcast would have about 22 million customers.

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(Millions of subscribers)

AT&T; Broadband: 16*

Time Warner Cable: 12.8

Comcast: 7.6

Charter Communications: 6.4

Cox Communications: 6.2

Adelphia Communications: 5.3

Cablevision Systems: 2.8

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*Since May, AT&T; has agreed to sell systems that serve several million subscribers.

Sources: National Cable and Telecommunications Assn., Kagan World Media

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