String of Pearls

9/28/2003 8:00 PM Eastern

While the AT&T Broadband acquisition may be the apex of cable deals for the moment, the success of Comcast's deal-making ability should come as no surprise to those who have followed the Philadelphia-based MSO for any length of time.

AT&T was just the latest in a long string of successful deals, dating back to Ralph Roberts's acquisition of his first cable system in Tupelo, Miss., in 1963.

While Comcast had been a respected deal-maker for years, the turning point — the transaction that vaulted the company into the big time and made Wall Street take notice — arguably was the Jones Intercable acquisition in 1998.

Comcast had done clever deals before, but the Jones deal put the Philadelphia MSO on the map. With 1.1 million subscribers and an ownership that didn't appear to want to sell, Comcast acquired a 37% interest in the Denver-based MSO from its Canadian telco partner, Bell Canada Inc.

A fine moment

Comcast executive vice president of finance and co-CFO Lawrence Smith said that while he wouldn't single out any one deal as a turning point, the Jones deal was certainly one for the books.

"It [the Jones deal] was probably one of our finer moments," Smith said. "In terms of the technical and all the moving parts and all the different things that could happen and how we worked it out and thought it through. Sometimes the small deals are more intricate, more complicated, than the big deals."

Stifel, Nicolaus & Co., analyst Ted Henderson, former executive vice president of finance and business affairs at Jones, agreed.

"I was at Jones and watched the Bell Canada scenario played out and I was an analyst when the Comcast deal hit," Henderson said. "When they started looking at Jones, they saw a scenario with a control block of shares that if you got you eventually got control of the company, and a dissatisfied relationship between Bell Canada and Jones. I think they saw that as opportunity."

Comcast next went after Prime Communications Inc., snapping up about 430,000 subscribers in the Washington, D.C., market. Comcast did that deal by making a $735 million loan — with a later option to buy — to Prime's principal owner, the Carlyle Group.

Smith said the Prime deal came about mainly because Carlyle was looking for a tax efficient way to do a deal.

"They wanted capital gains treatment and we wanted to do the deal," Smith said. "We structured it into a loan that later turned into a sale. One of the things that has always been good for us: we've worked hard to be flexible. We've done a lot of deals where other companies have basically walked away and we just kept banging away at it."

But Comcast has also showed the financial restraint to walk away when the deal isn't right. The prime example of that was the aborted attempt to purchase MediaOne Group Inc.

Break-up nets fee

Comcast had proposed to buy MediaOne for about $60 billion in stock and cash in 1999. It appeared that the deal would get done until AT&T Broadband made a counter offer to acquire the company.

Smith said Comcast had always worried that its bid for MediaOne could get trumped, and early on in the negotiations wrote a $1.5-billion break-up fee into the deal.

At the time, that break-up fee was about three times the norm.

"We set up the structure around the fear that we could be jumped," Smith said. "That's why we had a $1.5-billion break-up fee. There were some of us who would have pressed hard for a larger fee. We were concerned that somebody could come in."

That somebody turned out to be AT&T, which offered $62.5 billion for MediaOne.

Beyond the sizable break-up fee, Comcast also worked out further concessions that helped it increase its size by about 2 million subscribers — including getting some long-coveted systems.

Getting lenfest

"We had a couple of billion dollars of AT&T stock which we got because we sold them Teleport" Communications Group, Smith recalled, speaking of the private-line telecommunications carrier that Comcast and other MSO owners sold to AT&T in 1998. "As part of the arrangement, or the peace offering, we got two things: They would give us a bunch of cable systems in redemption of our AT&T stock and the other thing we got out of it was Lenfest."

Lenfest Communications had long been on Comcast's list of desirable cable properties — it had the bulk of its subscribers in the Philadelphia area — but owner Gerry Lenfest refused to sell.

When Lenfest decided to sell to AT&T, he was shocked to learn that AT&T had agreed to sell his systems to Comcast anyway.

Lenfest had long fought off overtures from Comcast — years ago Ralph Roberts had said it was his destiny to own the systems. In a published report after the Comcast deal had closed, Lenfest said he was crestfallen to learn that Comcast had purchased his company.

Smith said that looking back now, Lenfest should be happy that he received Comcast stock in the sale rather than AT&T shares, as he had originally intended. AT&T shares have dropped 57.1% (from $51.06 to $21.90) since that deal while Comcast shares have declined just 15.8% (from $34.47 to $29.04).

"I've pointed out to Gerry that it was worth a cool billion dollars to him," Smith said. "If he'd taken AT&T stock versus our stock and what's happened to the stock, he would have been an AT&T shareholder, he would never have been a Comcast shareholder. I point it out to him occasionally when I try to solicit him for various charitable donations, that I probably saved him a billion dollars. He's been very generous to my charities."

Shapiro: 'masterstroke'

Banc of America Securities cable analyst Doug Shapiro said one of the better aspects in that deal was that Comcast was able to convince AT&T to put a fixed value on the shares of its stock Comcast owned.

"The MediaOne deal was a masterstroke," Shapiro said. "At the time they owned $2 billion worth of AT&T stock. With the MediaOne deal, not only did they get [AT&T] to sell them 2 million subscribers, they said, 'We'll swap you back your own stock as partial currency and we're going to fix the value of the stock at the current price.' Which at the time was about $50. By the time they actually closed the deal, the stock had dropped to around $30."

To recap, the AT&T stock that Comcast had was a result of the Teleport sale. Comcast had only invested about $150 million in Teleport.

When Teleport was sold in 1998, Comcast's $150-million investment was worth about $3 billion.

"They took the $150 million and converted it into $3 billion — and then they converted it into a cash-flowing asset, all tax free," Shapiro said.

"You trace back the history of that transaction, it was textbook. Somebody should be studying that transaction."

The final irony — one that was not lost on Henderson — is that Comcast eventually acquired those MediaOne systems and the rest of AT&T Broadband for less than it originally bid on MediaOne.

TWE gets done

While in the throes of the AT&T Broadband acquisition, Comcast also scored another coup when it negotiated an exit from the Time Warner Entertainment LP partnership in a deal that brought Comcast $2.1 billion in cash, $1.5 billion in AOL Time Warner Inc. stock and a 21% interest in a future initial public offering of Time Warner Cable stock.

AOL Time Warner and AT&T had been trying to break up that partnership for years, but couldn't come to an agreement. When Comcast finally became a part of the negotiations, Smith said that timing had as much to do with reaching an accord as anything else.

"The relationship [between Time Warner and AT&T] had grown so bad between those two parties, had we not intervened it never would have gotten done," Smith said. "But [former AT&T CFO] Chuck Noski was great. We worked as a team."

"We like to take credit, but sometimes timing is important too," Smith added. "The time had come. [AOL Time Warner chairman and CEO] Dick Parsons had become the man, Gerry Levin was out, they were anxious to do an AOL deal, which we agreed to do. The stars were aligned."

Shedding $2B in debt

That agreement went a long way toward helping Comcast pay down the additional debt that it assumed in the AT&T acquisition.

Through a series of debt restructurings, refinancings, extending debt maturities and out-right payments, Comcast was able to eliminate about $2 billion in debt it assumed in the AT&T deal in less than six months.

As of June 30, 2003, Comcast had total debt, excluding exchangeables, of $26.7 billion, compared to the $29.5 billion the company had after the AT&T Broadband deal closed.

While a lot of that was just savvy financial engineering, Wall Street was at first concerned about the level of debt Comcast took on in the AT&T deal.

Comcast executive vice president and treasurer and co-CFO John Alchin played down the significance of the debt restructuring — largely a product of his, Smith's and the financial team's efforts.

"On the surface, it has nothing to do with the success of the integration [of AT&T Broadband]," Alchin said. "Where the financial strategy comes into play is we successfully put in place a foundation for the financial platform that doesn't add any additional stress on the integration story."

But after some prodding, Alchin admitted that by easing that debt pressure, Comcast was able to focus more intently on the issues at hand.

"The financial strategy doesn't add subscribers and it doesn't deploy new products," Alchin said. "It just means that it leaves the team on the 34th
floor [of Comcast headquarters] free to focus on the operational issues they need to focus on."

The Paul Allen 'put'

But not every negotiation works out the way Comcast initially planned. Smith said his most frustrating moment came when Comcast was negotiating its put rights to Charter Communications Inc. chairman Paul Allen. Comcast had acquired the put rights — worth about $730 million — as part of the AT&T Broadband acquisition.

Comcast had worked out an agreement where it would exchange the put rights for Charter cable systems of equal value. The way the deal was structured, Allen would buy the systems from Charter for cash and then sell the systems to Comcast for the put rights. The deal appeared to work out for everyone because Charter would receive badly needed cash to help it pay down debt and Comcast could lessen the tax blow by accepting assets instead of cash.

"We had structured that in what I thought was a perfect transaction," Smith said. "We were all very proud of this structure we created. But then he just paid cash. That was very frustrating because we had a deal that we thought was good for us, for Charter and for Paul."

"I got here one morning and I was told that the money had been wired," Smith added. "I said 'What are you talking about? Can we give it back?'

"We never got an answer other than it was just too complicated," Smith said. "I always figured there was some other reason, something that wasn't visible to us."

More recently came Comcast's sale of its 57.5% interest in QVC Inc. to Liberty Media Corp. for $7.9 billion. That deal closed Wednesday, Sept. 17.

While Smith said Comcast did not want to sell QVC, it was too good a price to pass up.

Comcast's total investment in QVC was about $365 million, giving it a 37.5% compound annual return on its investment.

The partnerships

For now, Comcast is focusing on myriad cable partnerships — its 50% interest in 1.4-million-subscriber Insight Communications Co.; a joint venture in Houston and Kansas City with Time Warner Cable; and several joint ventures with Adelphia Communications.

Comcast has estimated that the partnerships, its AOL Time Warner stock and the 21% interest in Time Warner Cable are worth about $10 billion.

"We don't consider ourselves to be out of the cable deal business," Smith said. "Our largest focus right now is to work out of these partnerships. Our objective is to turn those into more cable systems, if we can do that tax efficiently."

Content deals aren't out of the question, especially since Comcast decided not to bid on Vivendi Universal S.A.'s U.S. entertainment assets.

Vivendi is currently exclusively negotiating the sale of Vivendi Universal Entertainment with General Electric Co.'s NBC television unit. NBC is thought to have bid $14 billion for VUE.

Smith said Comcast dropped out of the VUE auction mainly because of the price. But he said that content deals are not off the radar screen.

"Because we looked at Vivendi, we are thinking more about content than we did before," Smith said. "Unfortunately, there's not a lot of content out there.

Several milestone cable transactions in Comcast's recent history.
SOURCE: Comcast and published reports.
Jones Intercable1.1 million$3.7 billion1998-99
Prime Communications430,000$750 million1998
Lenfest1.3 million$7.2 billion2000
AT&T Broadband595,000$2.75 billion2001
AT&T Broadband13 million$54 billion2002

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