AT&T; to Explore Cable Unit Merger With Comcast Too

AT&T;’s board has instructed its top management to contact Comcast Corp. about merging cable assets, according to several sources close to the two companies.

At the same time, AT&T; management plans to continue negotiations with AOL Time Warner and Cox Communications, although industry sources close to the board say the lack of formal bids from those two companies could indicate they are less serious.

The board met last week for the first time since mid-July, when directors rejected as insufficient Comcast’s unsolicited $40-billion offer to buy AT&T; Broadband, the nation’s largest cable operator. The board instructed AT&T; Chairman C. Michael Armstrong at the July meeting to find alternative proposals.

Armstrong and AT&T; Chief Financial Officer Chuck Noski have since flown across the country to meet with possible suitors, including Walt Disney Co. and Microsoft Corp. in addition to Cox and AOL.

None of the companies involved would comment on the negotiations.

But sources close to AT&T; say as part of the status report to the board last week, Armstrong outlined a proposal under which he would run the cable operation as a free-standing company with investments from partners such as Cox, Disney and/or Microsoft.

After the surprise Comcast bid, AT&T; postponed a planned spinoff of the cable unit that had been part of a broad restructuring of the telecommunications giant. AT&T;’s largest institutional shareholders had warned the company that they were not interested in a spinoff if current AT&T; management remained in place.

Part of Comcast’s pitch to investors is that it would do a better job running AT&T;’s troubled cable systems. Comcast’s operating profit margins are about double those of AT&T; Broadband.

AT&T; resisted Comcast’s offer for several reasons. The price was considered low compared with AT&T;’s cost of acquiring its systems. And, perhaps more important, AT&T; does not want to give Comcast’s controlling Roberts family management of such a large operation when they would have such relatively little equity in the combined company.

Those issues would be the subject of any negotiations between Comcast and AT&T.; The two companies have not yet held any talks because Comcast has refused to sign a confidentiality agreement. Comcast objected because of provisions in the agreement forbidding the company from teaming up to make a bid with another party.

Should AOL mount a serious bid for AT&T; Broadband, Comcast could bring in a backer such as Microsoft to sweeten its own offer. Microsoft has publicly vowed to enter the bidding to keep competitor, No. 2 cable operator AOL, from acquiring AT&T; Broadband.

The prospect of an AOL bid, however, may be dimming.

After the Sept. 11 terrorist attacks, AOL stock has slumped close to its 52-week low, as recession fears threatened financial targets the company promised Wall Street after the merger with Time Warner. The company also would face steep regulatory hurdles in a deal with AT&T; Broadband.

Investment bankers have been even more skeptical about Cox’s ability to pull off a deal with AT&T; Broadband. Cox, the nation’s fifth-largest cable operator, is not even half the size of AT&T.; The family that controls Cox also has been reluctant to do deals that would dilute their ownership.