The board of AT&T; Corp. unanimously rejected Comcast Corp.'s unsolicited $40-billion bid for its cable television unit. In a regularly scheduled meeting Wednesday in Denver, the board found Comcast's offer inadequate and instructed management to explore alternatives.
The company also postponed its planned spinoff of the cable unit, AT&T; Broadband, in what analysts and investors interpreted as a victory for Comcast.
"AT&T; is in a bind," said Adrian Davies, senior analyst at Federated Investors Management Corp., a large AT&T; shareholder. "It can't go out with a lower price in an initial public offering than Comcast is offering. They'll try to play a waiting game, but they have to look seriously at selling."
Disappointed by AT&T;'s dismal financial performance since entering the cable business two years ago, several large AT&T; shareholders have voiced their support for the Comcast bid. In a show of support, investors have bid up AT&T; shares 21% since Comcast's proposal 10 days ago. Comcast wants to merge its operations with AT&T; Broadband, the nation's largest cable operator, which is three times its size.
In its statement Wednesday, Comcast cited the stock increase as evidence of investor enthusiasm for the Philadelphia-based cable company's offer.
"Since our announcement, AT&T; shareholders have responded to our proposal by adding over $14 billion in market valuation to AT&T;," said Comcast President Brian L. Roberts. "We are surprised that AT&T;'s board has yet to ask us for any further information. To that end, we remain prepared to hold immediate discussions with AT&T; regarding our proposal."
Comcast sources added that they welcome an auction for AT&T; Broadband, confident that they would have the winning bid.
As recently as last week, AT&T; Chairman C. Michael Armstrong told investment bankers to proceed with plans for the spinoff of the cable unit, said Wall Street sources. AT&T; has maintained until now that the cable unit was not for sale.
A source close to the AT&T; board said the spinoff was temporarily suspended to give management time to evaluate options. The board is delaying mailing proxy material shareholders need to vote on the proposal to sell AT&T; Broadband stock to the public.
He said directors concluded, based on a presentation to the board by AT&T; investment banks Credit Suisse First Boston Corp. and Goldman, Sachs & Co., that AT&T; Broadband was worth more than the $40 billion Comcast offered. That price, he said, didn't adequately value the 1 million phone customers and 2 million high-speed Internet subscribers AT&T; Broadband will have by year-end. AT&T; Broadband has been more aggressive than any other cable company in rolling out advanced services.
The source said AT&T; has received no other bids. If there were, the board probably would take up the issue at its next regularly scheduled meeting in September.
The merger of AT&T; Broadband and Comcast would create the nation's largest cable operator, reaching one in four U.S. households. Such reach would make Comcast more powerful in the pay-television business than either AOL Time Warner Inc., the second-ranked cable operator with 12 million subscribers, or DirecTV Inc., the satellite leader that serves 10 million customers.
As a result, speculation that other bidders would emerge has swept through the cable industry
"No one wants Comcast to have 22 million subscribers, but no one is in a position to stop them either," said Davies. "No other company is in as good a position to bid as Comcast."
Indeed, virtually every major cable company has hired an advisor to consider whether to bid for AT&T; Broadband, which has 13.5 million subscribers in some of the choicest markets, including Los Angeles, Chicago, San Francisco, Boston and Atlanta.
One source close to Comcast said cable operators already have tried to bluff the company into granting concessions in exchange for staying on the sidelines during the bidding process. But he said that none would be given until a bona fide counteroffer to Comcast's was made.
Sources close to both companies said AT&T; would try to prolong the bidding process. AT&T; will be trumpeting its financial improvement during its earnings conference calls with Wall Street next week.
One of Comcast's biggest selling points to investors is that its profit margins are much higher than AT&T;'s.