Comcast's $58B Blockbuster
Comcast decided to issue an unsolicited proposal after AT&T Corp. (NYSE: T) made preliminary filings with the U.S. Securities and Exchange Commission to issue a tracking stock for AT&T Broadband.
"We really tried to do this privately... [but after seeing the filing] we decided it was now or never," said Comcast president Brian L. Roberts in a teleconference today. "We want to make a deal here."
AT&T has been planning since last year to spin off AT&T Broadband, as part of a four-part move to create separate entities from its four key businesses. Besides AT&T Broadband, the businesses include AT&T Wireless, for which a tracking stock was issued today; AT&T Business, selling enterprise services; and AT&T Consumer, selling residential services.
AT&T and Comcast reportedly had been talking for months about the possibility of a merger. But talks ceased before AT&T's latest SEC filing. Neither AT&T nor Comcast will give specific reasons.
AT&T did not return calls regarding the matter at press time.
Comcast proposes to issue $44.5 billion worth of its own stock and would assume $13.5 billion of AT&T Broadband's outstanding debt to complete the transaction. Further, Comcast intends to acquire AT&T's stakes in Time Warner Entertainment Co., Cablevision Systems Corp. (NYSE: CVC), and Cablevision subsidiary Rainbow Media Holdings Inc. "by assuming more debt and issuing more equity to reflect their value."
The potential deal could have many pluses. Shareholders of AT&T would receive a sizeable premium, in part because the transaction would be tax-free. In addition, Comcast expects to realize benefits in terms of cost savings, better margins, and improved revenues amounting to "1.25 billion annually upon the full integration of Comcast and AT&T Broadband." And Comcast says financial improvements would happen at least two years faster than they would if AT&T Broadband went solo.
Comcast also says the deal, if successful, would accelerate the growth of broadband services, in which fiber at the operator's head end is linked via coaxial cable to cable TV customer homes and businesses. The types of emerging services, still "on the drawing board," according to Roberts, include video-on-demand, interactive TV, e-commerce, and voice-over-IP. While it's been slow getting off the ground, analysts predict the market for these services could double in growth within two years.
"We think someone needs to lead the way to drive development of new consumer services," said Roberts. High-speed links to homes will fuel tremendous growth in residential broadband services, he indicated. And links to 22 million homes would result from the combination (14 million from AT&T Broadband, 8 million from Comcast).
Suppliers applaud. "My reaction was, 'Wow!' " says Jeff Gwynne, VP of marketing and founder of Quantum Bridge Communications Inc. "It would open up more markets and opportunities." Quantum Bridge just announced its role in the activation of Comcast's passive optical networking (PON) infrastructure in Baltimore (see Quantum Bridge Lights Baltimore). The deployment is the first of several that Quantum Bridge plans through its relationship with Comcast, the specific value of which hasn't been disclosed.
AT&T Broadband suppliers potentially affected by a merger include Antec Corp. (Nasdaq: ANTC), C-Cor.net (Nasdaq: CCBL), Harmonic Inc. (Nasdaq: HLIT), Scientific-Atlanta Inc. (NYSE:SFA), and Sorrento Networks Corp. (Nasdaq: FIBR).
There are downsides too. For one thing, Comcast would face a daunting task integrating its business with that of AT&T Broadband, which has been struggling this year, along with other players in the space (see AT&T Broadband Pares Cable Crew).
One of the biggest challenges is that AT&T's network needs upgrading in order to create the kind of broadband services powerhouse Comcast envisions. In today's conference call, Comcast's Roberts acknowledged that slightly more than half of AT&T Broadband's facilities have been rebuilt to support broadband services over cable links. In comparison, he says Comcast's network will be 90 percent rebuilt by year's end. While Roberts sees no problem achieving the total buildout, it's clearly a challenge.
Analysts also see a potential downside in the all-stock nature of the deal, saying it could nullify some of the benefits outlined above. "This is a stock for stock deal and due to pressure on [Comcast's] shares and what will undoubtedly be an in-depth regulatory review process, we believe there will be a significant discount given to [the] initial [shareholder] premium," writes analyst Jim Linnehan of Thomas Weisel Partners in a note today. Linnehan does think AT&T should take the deal.
Comcast also reportedly met resistance in earlier talks with AT&T because of the potentially enormous influence a merger would give the Roberts family members, including Comcast president Brian and his father, Comcast's founder Ralph J. Roberts, who serves as chairman of the board. In today's call, Brian acknowledged that Comcast's proposal would ultimately give his family a voting percentage "in the high forties."
Apparently, investors have mixed feelings. At press time, Comcast's Class A shares were trading at $38.95, down 2.90 (6.93%). AT&T shares were trading at $18.70, up 1.98 (11.94%).
- Mary Jander, Senior Editor, Light Reading