Cable Firm Makes Offer for Disney

The nation’s largest cable television company stunned Walt Disney Co. on Wednesday, launching a $51-billion takeover bid for the legendary entertainment company, a move that could endanger the stewardship of Chairman Michael Eisner.

The offer by Philadelphia-based Comcast Corp. sets the stage for a bitter battle for control of the storied Disney empire, which evolved from a small cartoon factory in Hollywood in the 1920s into a global entertainment giant with such wide-ranging assets as Mickey Mouse, “Monday Night Football,” ESPN, Disneyland and the hit film “Pirates of the Caribbean.”

The timing of Comcast’s offer couldn’t have been worse for Eisner. Under fire from critics for his management, Eisner had planned to trumpet recent strong earnings and stock growth during a carefully orchestrated gathering of Wall Street analysts in Orlando, Fla.

Instead, Comcast Chairman Brian L. Roberts spoiled the party by disclosing that the cable company had initiated the unsolicited bid, which would create the world’s largest media company in terms of revenue. Comcast offered Disney shareholders $51 billion of Comcast stock, based on Wednesday’s closing prices. Comcast would assume Burbank-based Disney’s $12 billion in net debt.

“This is a very exciting moment,” Roberts said in a conference call with investors and analysts. He said the combination “would create one of the world’s premier entertainment and communications companies, and, we believe, restore the Disney brand to prominence and the company to growth.”

Roberts, 44, considered one of the shrewdest deal makers in the media industry, said Eisner spurned a friendly overture Monday to merge their companies. “Given this,” Roberts said in a letter to Eisner on Wednesday, “the only way for us to proceed is to make a public proposal directly to you and your board.”

Although Roberts is little-known in Southern California, his company has quickly emerged as a major media player, one of the few with the financial wherewithal and motives to make a Disney bid.

Following in the footsteps of his father, Ralph, Roberts has transformed Comcast into a Wall Street darling with 21.5 million cable subscribers, 500,000 of whom are in Los Angeles. The company also owns such diverse assets as the Philadelphia 76ers basketball team and the Philadelphia Flyers hockey franchise.

Roberts showed he could pull off a difficult deal when two years ago he bought AT&T;’s cable systems. As with the Disney offer, that acquisition started with a bid termed too low. Eventually, Roberts increased the amount, winning the prize.

Comcast executives said a Disney merger would create a giant poised to take advantage of the unfolding digital communications age that promises consumers videos on demand and a seemingly endless array of entertainment choices. They also said they were better poised to address such nagging problems as lackluster ratings for Disney’s ABC network and the sluggish performance of its theme parks.

Disney is the largest publicly traded company headquartered in Southern California by revenue, ranking 61st on the Fortune 500 list of major U.S. companies in 2002, with $25 billion in revenue that year.

Disney’s formal response to Comcast was measured. The company advised stockholders to sit tight. But indications from both Comcast and sources close to Disney’s board are that the company probably will reject the offer, setting the stage for a potentially nasty fight that could quickly become a referendum on Eisner’s leadership.

In afternoon remarks to investors, Eisner said company directors had requested an in-depth analysis of the bid from Disney’s managers and advisors.

“This is the toughest battle he’ll face in his career,” said media analyst Timothy Wallace of UBS Securities.

In recent weeks, Eisner, 61, has endured the most intense criticisms of his nearly 20 years on the job. He has been subjected to an almost daily assault from two former directors, Stanley Gold and Roy E. Disney, who are seeking his ouster. They have accused Eisner of mismanaging the company’s long-term prospects by failing to fix ABC, reinvigorate the theme parks and keep talented executives.

Roy Disney and Gold also have accused Eisner of bungling negotiations with its partner, Pixar Animation Studios, which two weeks ago broke off contract extension talks. Among Pixar’s string of hits was last year’s blockbuster “Finding Nemo.”

“The Walt Disney Co. would not be susceptible to this kind of offer it is now receiving if Michael and his board paid attention over the last seven years,” Gold said. “We would hope that the board would now deal with this matter in the best interests of shareholders, and not in Michael’s best interests.”

On Wednesday, Institutional Shareholder Services, a major advisor to stockholders, delivered another blow to Eisner, recommending clients refrain from voting for him as a director at Disney’s coming annual meeting. The group held him responsible for “boardroom battles and management departures.”

“At the end of the day, all roads lead back to Eisner,” the organization wrote.

In a statement, Disney disputed the criticisms, calling them “inexplicable and unjustified.”

It was in an effort to rebut such criticisms that Eisner invited analysts and investors for three days at the Contemporary Resort at Florida’s Walt Disney World. He came armed with a strong quarterly earnings report as proof that his strategies are turning the company around.

But the financial and symbolic implications of Comcast’s move overshadowed the proceedings. A day that was supposed to consist mainly of pep talks and behind-the-scenes tours of Walt Disney World turned into a dash for phones as analysts called clients and prepared reports on what the blockbuster merger would mean.

“I don’t know anyone who was expecting this,” UBS’ Wallace said. “This was the best-kept secret on Wall Street.”

The reverberations also shook boardrooms across America. Viacom Inc. Chairman Sumner Redstone said the deal “would be a transforming event for Comcast, which would elevate it from a cable company to a media giant, and Brian is undoubtedly on the right track.”

He added: “But, for Disney, Eisner might justifiably take the position that the company is doing better, the earnings and stock are rising and that he does not need a merger partner.”

At a minimum, analysts said, the bid puts pressure on Eisner to offer shareholders more value for their holdings as a way to undermine Comcast’s efforts.

Several analysts said Disney’s ability to block a takeover is limited. In addition, Washington lawmakers and regulators vowed to weigh in on the deal.

The board could reject the proposal on the grounds that the offer is too low. But that would leave open the opportunity for Comcast to raise its bid, as many expect will happen. Disney could attempt to merge with another company such as satellite-TV service EchoStar Communications Corp. to fend off Comcast. But the company might be hard pressed to convince shareholders that such a pairing would be better than a deal with Comcast given its much larger reach.

Many believe a Disney-Comcast merger makes good strategic sense for both companies. Comcast would benefit from Disney’s vast entertainment library, while Disney’s cable channels, especially ESPN, would gain added leverage in negotiations with cable operators because of Comcast’s distribution clout.

“This would make Comcast the most important player in advertising,” said Jordan Rohan of Schwab SoundView Capital Markets.

Disney shareholders may be swayed by Roberts’ long-term track record in building his business and boosting the stock, said Jeffrey Bronchick, chief investment officer for money management firm Reed, Conner & Birdwell in Los Angeles.

“Comcast hasn’t screwed up in a material way yet,” said Bronchick, whose firm holds 1.5 million Disney shares and 900,000 Comcast shares.

He called the Comcast bid “a brilliant strategic move” and said it would be extremely difficult for Eisner to fend it off. “I think it’s a done deal. Disney is too big to hide and just say no.”

Still, there are no guarantees of success. Although Comcast has by all accounts done a masterful job turning around the troubled AT&T; Broadband properties, it has no experience in the movie, theme park and consumer products industries.

But Comcast may be the only game in town. Analysts said there are no obvious friendly suitors with the means to rescue Disney.

Companies such as Microsoft Corp. have business ties to Comcast, and have long refrained from investing in Hollywood. Another potential suitor, News Corp. Chairman Rupert Murdoch, ruled himself out as a rival suitor during a conference call. Time Warner Inc. is unlikely to bid with a Securities and Exchange Commission investigation pending, and Viacom probably would face too many regulatory hurdles.

The board has options, but they are limited, analysts said. Directors could reject the offer of 0.78 share of Comcast Class A stock for each Disney share, in total about $5 billion above Disney’s value the day before the bid was announced. Comcast’s offer was considered by many to be an intentionally low offer.

Based on the company’s closing stock price, the deal values Disney at $24.36 a share. Analysts said a more reasonable price would be $30 to $32 a share.

Disney’s stock zoomed $3.52 to close at $27.60 -- a sign that investors expect the value of Comcast’s bid to rise by at least that much, or that another bidder will enter the picture.

The events unfolded early Wednesday.

At a morning news conference in New York, Roberts and Comcast Cable President Steven Burke made their case by bringing up criticisms of Disney, including Burke calling ABC a “weak No. 4” among networks.

They added that Disney’s ABC Family cable channel makes little or no money despite the more-than-$5-billion price Disney paid to acquire it.

All told, the Comcast executives said they could boost Disney’s cash flow by as much as $1.2 billion in three years, focusing immediately on ABC and Disney’s cable channels.

Improving ABC would raise cash flow by $300 million to $500 million in three years. Boosting the cable channels would add an additional $200 million to $300 million, Burke said, adding that the two firms could jointly cut costs $300 million to $400 million.

Burke added that Comcast would seek to restore the luster of Disney’s once-fabled animation division, which lately has produced such disappointments as “Treasure Planet.”

“Until fairly recently, the Disney animation business was the unchallenged leader in the industry,” Burke said. “It was the dream of every great animator to grow up some day and work for the Walt Disney Co.”

Burke also hinted Comcast might patch up Disney’s rift with Pixar, which was blamed in part on personality differences between Eisner and Pixar CEO Steve Jobs.

Roberts deflected questions about Comcast’s financial offer and refused to discuss his strategy for coaxing Disney to sell. He said he was not working in tandem with Walt Disney’s nephew, Roy, and Gold.

“We want to make this as friendly as possible,” he said, “as fast as possible.”

Bates reported from Los Angeles, Verrier from Orlando, Fla., and Hamilton from New York. Times staff writers Claudia Eller and Tom Petruno contributed to this report.

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Two media giants

Comcast

Stock market value: $69.3 billion

Wednesday’s closing price: $31.23, down $2.70

2003 sales: $18.3 billion

Key holdings: Largest U.S. cable television system, with 21.5 million subscribers; Philadelphia Flyers and 76ers sports teams; E! Entertainment Television; Style Network

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Disney

Stock market value: $58 billion

Wednesday’s closing price: $27.60, up $3.52

2003 sales: $27.1 billion

Key holdings: Walt Disney Pictures and Miramax Studios; ABC network and 10 television stations; cable networks ESPN and Disney Channel; 10 theme parks

Sources: Associated Press, Bloomberg, Times research

Los Angeles Times