A Strategy of Opening the Door Before Opportunity Has to Knock
By GERALDINE FABRIKANT
Brian L. Roberts's bold $50 billion takeover of AT&T's cable business two years ago was seen as his defining moment. But that deal, it turns out, may have been just for starters. Not content running the nation's largest cable company, Comcast, Mr. Roberts set out yesterday to create the world's largest media company.
And just as Mr. Roberts did with his initially unsolicited AT&T offer, he is once again going after a company - Walt Disney- that has a storied brand name but is distracted by management turmoil.
His effort could fall short for various reasons, but lack of ambition is unlikely to be one of them. After all, reaching ever higher has been Comcast's defining trait since Mr. Roberts's father, Ralph, a former maker of men's belts, co-founded the company by buying a 1,200-subscriber cable system in Tupelo, Miss., and some other undeveloped cable franchises for $500,000 in 1963, when Brian was 3 years old.
Ever since, Comcast has focused on acquiring and operating cable systems, and Ralph Roberts and, eventually, his son, developed reputations as disciplined operating executives and steel-nerved deal makers whose family's stake is worth more than $850 million. Now Brian Roberts, who became Comcast's president in 1990 and added the chief executive's title in 2001, means to become a full-fledged media mogul. His plan is to combine Comcast and its 21.5 million cable subscribers with Disney, a merger he described as a marriage of distribution and content that would let "our customer access the best of Disney, which is the entertainment leader.''
If he was able to describe little else by way of grand strategy, beyond noting that Disney is the "leader in kids, sports, news and movies,'' it may be because the takeover offer is based as much on opportunity as vision. Mr. Roberts said that Disney offered the chance to create new cable channels, to cross-promote existing cable channels and to create subscription-on-demand packages of Disney programming, among other advantages.
Owning a movie and television studio could also help buffer Comcast from rising programming costs. The cable industry has been fighting rising costs, and has nowhere been more outspoken than in protesting the rising fees for Disney's ESPN sports service.
But in a news conference yesterday at the St. Regis Hotel in Manhattan, Mr. Roberts spent as much time discussing the financial details of his company's all-stock offer as he did talking about the creative opportunities that might come with acquiring the keys to the Magic Kingdom.
To a large degree, the move is a matter of timing. Mr. Roberts has long been known to be interested in expanding Comcast's media-content properties beyond the current modest collection, which includes a regional sports channel and the E! Entertainment Network. And Comcast's name had surfaced as a potential bidder last year when Vivendi Universal's American entertainment assets were on the market.
But under the terms of its 2001 purchase agreement for AT&T Broadband, Comcast had been precluded until last November from making any major deal that would dilute the stake of the original AT&T shareholders. Now freed from that restriction, Mr. Roberts is pulling the takeover trigger at a time when Disney's chairman, under fire from a dissident shareholder, Roy E. Disney, is seen as potentially vulnerable.
As indicated by its robust fourth-quarter earnings report, Comcast is attacking from a position of strength. The company earned $383 million, or 17 cents a share, compared with a loss of $51 million a year earlier. Revenues, $4.7 billion, were up from $3 billion in the comparable quarter of 2002.
But for all Comcast's success as a cable operator, acquiring an entertainment conglomerate like Disney would mean management challenges vastly different from the relatively predictable cable business.
In justifying the merger strategy yesterday, Mr. Roberts noted that Comcast had helped start several cable networks, including the Golf Channel. And he is betting heavily that Comcast's executive vice president, Stephen B. Burke, who had been a rising Disney executive before joining Mr. Roberts in 1998, could improve the performance at some of Disney's troubled units, including the ABC broadcast network. Mr. Burke is widely credited with helping improve the profitability of the underperforming cable systems that Comcast acquired from AT&T.
Mr. Roberts said he also saw opportunities for improving some of Disney's cable channels, particularly the ABC Family Channel, which was performed poorly since Disney acquired it from the News Corporation for $5.2 billion in 2001.
Yet Richard Greenfield, who follows Comcast and Disney for Fulcrum Global Partners, a research firm, was less certain that Comcast had the executive talent to fix Disney. "While Comcast has done a great job managing cable systems and networks, its ability in core Disney assets such theme parks and animation are unknown,'' Mr. Greenfield said.
The Roberts family - of five siblings, only Brian works at Comcast - controls 33 percent of the shareholder votes. They mean to retain that level under the terms of the Disney takeover offer. And some financial experts noted that, even if Comcast has the financial firepower to fight a takeover battle, it runs the risk of paying too much to win it.
Disney shares, which before yesterday's opening bell were trading at a multiple of about 13 times cash flow, compared with 11 times cash flow for Comcast. That means, in essence, that Disney's stock is more expensive than Comcast's, so an all-stock deal would dilute investors' earnings from Comcast's stock.
When Mr. Roberts made his initial bid for AT&T's cable business in a letter to AT&T's chairman, C. Michael Armstrong - that, as with yesterday's letter to Mr. Eisner, Mr. Roberts released publicly - the offer was $44.5 billion. AT&T initially resisted, but ended up putting the cable company up for auction, forcing Comcast into a bidding war with AOL Time Warner and Cox Communications.
Yesterday, by bidding up Disney's share price 14.6 percent, to $27.60 while beating down Comcast's 8.6 percent to $30.10, investors seemed to be betting that the initial $54.1 billion offer was only a starting point.
"It is not actually that cheap,'' said Bruce Greenwald, a professor of finance at Columbia Business School, who teaches a course in media mergers. "And unless Comcast can improve the management of the company substantially, they are not getting such a bargain even if they do a deal at this price, which is unlikely.'' |
