Comcast bids $58B for AT&T Broadband
by Peter Lauria
Posted 06:30 PM EST, Jul-8-2001
Philadelphia-based Comcast Corp., the third-largest U.S. cable operator, launched a $58 billion takeover bid for AT&T Corp.'s troubled broadband unit late Sunday.
Under the proposed deal, Comcast would issue 1.0525 billion shares of stock, valued at $44 billion based on Comcast's Friday closing price, and assume $13.5 billion in debt.
The multiple of 30 times 2000 Ebitda and $4,000 per subscriber represents significant premiums over AT&T Broadband's value, considering its heavy debt load and cash flow margins that lag well below industry averages.
Comcast also said that as part of its offer, it would buy stakes in its two biggest competitors in the Northeast, offering to acquire AT&T's 25% interest in Time Warner Entertainment and 30% stake in Cablevision. Such a move, however, is bound to raise serious antitrust concerns.
AT&T is negotiating to sell both stakes in an effort to reduce its roughly $46 billion of debt — about $15.5 billion of which is ascribed to the broadband unit.
Industry watchers have been speculating that the broadband unit could be a target for cash flow rich Comcast once it was spun off from the parent company as part of AT&T's plan to break itself into four operating groups. That AT&T is not a traditional cable operator and got into the business with the acquisitions of John Malone's TeleCommunications Inc. in 1999 and MediaOne Group Inc. in 2000, the latter acquisition topping a $48 billion bid by Comcast, may have paved the way for a takeover given Broadband's poor operating performance.
AT&T's board must have anticipated a bid since it wrote provisions into a proxy statement prepared for the breakup requiring that any suitor for the broadband unit "to seek the voting power represented by all of the outstanding capital stock of AT&T entitled to vote on that acquisition. As a result, this may discourage potential interested bidders."
Comcast softened the blow Sunday by proposing to allow AT&T shareholders to retain a majority of the economic and voting interest in the combined company, which would become the nation's largest cable operator upon consummation with 22 million subscribers, many of whom would be clustered in the densely populated Northeast.
In addition, Comcast is structuring the deal as a merger in effort to effect a tax-free transaction.
"Over the last several months, we held discussions with AT&T Broadband regarding this combination," Comcast president Brian Roberts said in a statement. While AT&T has repeatedly said it is not interested in selling the unit, Roberts forced the issue further by saying: "It is unfortunate that we were not able to agree on a basis for continuing our dialogue."
Roberts added that AT&T's board "should consider our proposal before a proxy statement relating to its broadband tracking stock proposal is sent to shareholders later this month."
Comcast and AT&T could not be reached for comment. There was no official response from AT&T. Comcast said it was receiving financial counsel from Morgan Stanley, J.P. Morgan & Co. and private equity firm Quadrangle Group. Davis Polk & Wardwell is providing Comcast with legal advice.
AT&T CEO Michael Armstrong's pursuit of convergence has not gone as well as planned. The company has spent aggressively to upgrade TCI's outdated systems and to roll out new digital services, such as high-speed Internet access, telephony and digital video. While analysts say such services can increase Ebitda growth by roughly 50%, AT&T's systems have been unable to generate numbers half as good as those of their peers. For the first quarter, AT&T Broadband posted $2.4 billion in revenue and $394 million in Ebitda, a growth rate of only 10.9% on margins of 16%. By contrast, Comcast, considered by analysts to be among the most efficiently run cable operators, runs on about 40% cash flow margins.
Roberts said Comcast expects to generate savings of at least $1.25 billion annually upon full integration of the systems, with the possibility for those numbers to reach between $2.6 billion and $2.8 billion with margin improvements. |
