cable M&A?
Cox May Appear as Bidder
For Cable Units of AT&T
By Deborah Solomon
Staff Reporter of The Wall Street Journal
As the media and cable giants of the world tune into the saga of AT&T Broadband, a low-profile Southern company may be getting the best reception so far.
Ever since Philadelphia's Comcast Corp. made a $40 billion unsolicited and rejected bid for AT&T Broadband in July, there has been speculation that the likes of AOL Time Warner Inc., of New York, and Walt Disney Corp., of Burbank, Calif., could come up with alternative bids. However, Wall Street and cable executives have discounted the ability of Cox Communications Inc., the nation's fifth-largest cable-television concern, to win the hand of the much-larger AT&T Broadband, the nation's largest cable-TV operator.
But, Cox could end up being the sleeper. The Atlanta cable-TV concern has held preliminary talks with AT&T Corp., the parent of AT&T Broadband, of Denver, about a possible pairing, according to people familiar with the situation. Cox, which is controlled by Atlanta's influential Cox family, is one of the few companies -- if not the only one -- to sign a confidentiality agreement with AT&T, according to people familiar with the matter. That pact, which allows the two companies to swap detailed financial information and prevents them from sharing it with other parties, signifies that AT&T has had some of its most extensive discussions with Cox.
"There is a lot of data flowing back and forth between the two," a person familiar with the talks says. Spokeswomen for Cox and AT&T declined to comment.
To be sure, a Cox-AT&T deal is a long shot, largely because the Cox family would own a minority stake in a combined entity, thereby relinquishing its coveted control position. Cox's pockets also may not be deep enough. The most logical outcome remains for Comcast -- which has a much larger market capitalization than Cox -- to reach an agreement to buy AT&T Broadband and then sell off systems covering several million cable subscribers to other providers, such as Cox, as a way to prevent a bidding war and make peace. Cox's discussions with AT&T thus may give it more leverage for an eventual side-deal with Comcast.
Still, as AT&T weighs its options and explores "strategic and financial alternatives" for AT&T Broadband, Cox is looking like a "white knight" or friendly suitor that could help AT&T stave off Comcast. Cox also is a kindred spirit that has spent the past four years rolling out a technology near and dear to AT&T's heart: cable telephony. AT&T and Cox are the only two big cable-TV operators to have broadly deployed the service, which transmits telephone calls over cable-TV lines. If the two companies combined forces, they would control more than one million cable telephony customers -- a number that may be too enticing for AT&T Chief Executive C. Michael Armstrong to pass up.
Mr. Armstrong got into cable in large part so he could roll out telephony to help compensate for AT&T's eroding consumer long-distance revenue. The company has spent billions of dollars readying its cable lines to handle telephone service and says it expects to break even on the product within nine months. Selling to a company such as Comcast, which hasn't been as hot on the idea of cable telephony, could be seen as a failure for AT&T.
Cox, though, is committed to cable telephony as a way to generate additional revenue from its cable-TV lines. Cox CEO James O. Robbins in an interview says deploying cable telephony "was a lot harder than we thought and took longer than we anticipated. But it meets consumers' needs and leverages the attributes we have." He declined to comment on the possibility of a Cox-AT&T Broadband deal.
Both AT&T and Cox are rolling out high-speed Internet service and digital video, as well as experimenting with video-on-demand and other interactive services.
"Part of the reason C. Michael Armstrong is deflecting Comcast's offer is because Comcast has taken a very different strategic approach to how to develop its cable properties," says Fred Moran, an analyst with New York securities firm Jefferies & Co. Mr. Armstrong's vision "is a bundle of telephone, digital-based cable and high-speed Internet access. The only other operator that has followed that strategy has been Cox."
Perhaps more important is the success Cox has had in deploying these new technologies while managing to keep its profit margins high, at about 39%. AT&T Broadband has struggled with one of the narrowest profit margins in the cable-TV industry -- 18% in 2000.
Cox, with 6.1 million customers, is looking to expand its cable empire. With programmers growing bigger and charging higher prices for content, Cox seeks to get bigger in order to maintain its leverage, people close to the company say. Cox has spent $10 billion during the past three years buying cable properties in such places as Baton Rouge, La., and Northern Virginia and it seeks to expand further, these people say.
A deal with AT&T Broadband would catapult Cox to the No. 1 spot in the cable-TV business, with about 20 million subscribers. ( Charter Communications is No. 4 with seven million subscribers, Comcast is No. 3 with eight million, while No. 2 AOL has 12.6 subscribers.) Financially, Cox, which has a market capitalization of $24.5 billion, could follow the same deal structure proposed by Comcast, merging the two entities in a stock-swap that would give AT&T shareholders a majority ownership in the combined company.
Cox Communications is controlled by Cox Enterprises, a family-owned concern that retains a 65% economic stake and 77% voting control in Cox Communications. Both companies were founded by James M. Cox, a former Ohio governor, and still is controlled by his daughters, Barbara Cox Anthony, 78 years old, and Anne Cox Chambers, 81, as well as Mr. Cox's grandson, James C. Kennedy, 53, chairman of Cox Communications and CEO of Cox Enterprises. Each Cox sister has shares in Cox Enterprises valued at more than $10 billion.
The stumbling block, and the reason many doubt Cox will pull the trigger, is that the Cox family hasn't wanted to dilute its voting stake, and a deal with AT&T, especially if it involves paying a good premium, could push its ownership stake to less than 30%. Should the family decide that this is the deal to transform its cable company, it may have a big advantage over Comcast in the eyes of AT&T.
Some AT&T board members strongly oppose a Comcast deal because the Roberts family, which controls Comcast, would control too much of the combined entity, even though its financial ownership would be much less. The Roberts family has a 2% economic and 86% voting stake in Comcast but offered to reduce its voting stake to about 45% and its economic stake to 1%. The Cox family has its voting stake more closely aligned to its financial ownership, potentially making a deal more palatable.
Much may depend on whether the Cox family is willing to stomach a negative reaction, even a temporary one, to Cox's stock. Comcast, which has a market capitalization of $35.9 billion, saw its stock fall 10% after launching its bid. Even if Cox strikes a deal with AT&T, it may not win, for Comcast could top an offer from Cox.
Write to Deborah Solomon at deborah.solomon@wsj.com |
