AT&T Corp. has kept busy seeking alternatives to Comcast Corp.'s rejected $52-billion bid for AT&T Broadband.
The telco's talks with potential bidders for the cable unit include discussions with media giants AOL Time Warner Inc. and The Walt Disney Co.
Sources confirmed a report in The Wall Street Journal
last week that said AOL was in preliminary talks with AT&T Broadband, adding that no official offer is on the table.
Also last week, Disney president Robert Iger told CNBC that an AT&T Broadband bid was "not out of the realm of possibility." Reports have said Disney is considering joining a bidding consortium that includes Cox Communications Inc. and Charter Communications Inc.
AOL declined to comment, citing company policy not to comment on speculation. Officials at Cox and Charter also declined comment.
According to the Journal, AOL has proposed a deal in which it would spin off its 12.7-million-subscriber Time Warner Cable operation and merge it with AT&T Broadband, creating a cable behemoth with about 26.2 million customers.
AOL proposes a structure that would give AT&T shareholders 50 percent of the equity and control of the combined unit, with AOL getting 45 percent of the equity and vote, the report said.
One way the AOL bid would differ from Comcast's is in voting control. Comcast's proposal — down to $52 billion from $58 billion, as Comcast stock has fallen — would give the ruling Roberts family 42-percent control of the combined company, even though the Robertses would hold only about 1-percent equity.
AOL's proposal would be closer to the "one-share, one-vote" philosophy said to be favored by the AT&T board of directors.
Iger told CNBC last week that several different parties had approached Disney about an AT&T bid. He declined to elaborate on which companies were seeking Disney's help, adding that the identity of potential partners is not as important as how a potential deal would be set up.
"We're more interested in the nature of the deal — the cost, what our investment would be and the impact on the business going forward," Iger said. "It's not about the partner, it's about the deal."
The consensus among analysts, though, was that Disney would be likely to partner with an existing MSO, which would be called on to manage the systems.
Though AT&T declined to comment on the speculation surrounding potential bidders, a source close to the company said Comcast's move sparked a lot of interest in Broadband.
"[AT&T] has gotten a lot of bidders," said the source, who asked not to be named. "A lot of people are interested, some of whom [AT&T] is taking seriously. They are having serious conversations and are engaging them in a serious way."
The source said it could take anywhere from 30 to 90 days before any decisions are made by AT&T as to what to do with the Broadband unit.
Despite the threat of competing bids, Comcast is unlikely to increase its offer anytime soon, sources at the company said.
"Until there is something to look at, [Comcast] will sit and wait," one Comcast source said. "So far, we are the only bidder on the table."
Several industry analysts speculated that any AOL or Disney bid would face intense regulatory scrutiny and, in the case of AOL, might be bad business.
"It doesn't make any sense to me," said Sanford Bernstein & Co. Inc. analyst Tom Wolzien. "If they [AOL] actually acquire and run it, you take the lid back off the regulatory Pandora's box that just got nailed down. If they spin it out, it takes its cash flow with it and in this advertising environment, the last thing AOL needs to do is make itself more reliant, percentage-wise, on advertising."
If Disney makes a bid, it is expected to be a minority investor, which could exempt it from regulatory problems.
Whether or not AOL will make a formal offer remains to be seen. If it does, AOL rival Microsoft Corp. could be drawn into the fray. Microsoft owns about $1 billion of Comcast stock and has a $5-billion investment in AT&T.
"If AOL is a legitimate bidder, than I assume Microsoft becomes a peripheral player, but a more active participant," said SG Cowen Securities Corp. analyst Gary Farber. "Microsoft will not sit idly by."
BROADBAND TOUTS ITSELF
AT&T decided to hold an unusual conference call with analysts last week to provide more detailed financial information on Broadband.
It may have been designed to allow AT&T to justify its July 18 rejection of Comcast bid's — and jawbone a higher offer — but it also helped analysts understand more about the unit's operations.
AT&T executives touted Broadband's improved performance, saying cash-flow margins were up to 19.5 percent in the second quarter, including restructuring charges, from 16 percent in the first quarter. They also chose to highlight the importance of cable telephony in driving additional growth.
Chairman C. Michael Armstrong pledged to raise cash-flow margins to 38 percent to 40 percent in three years, a level that's near what other MSOs deliver.
AT&T spent a good portion of the call justifying its decision to invest in circuit-switched telephony, rather than waiting for Internet-protocol technology to become available. Cox is the only other big MSO to take the circuit-switched path.
Broadband chief technology officer Greg Braden said that by signing up telephone customers using existing technology, AT&T builds market share and gets through early growing pains.
"If you haven't gone through that learning curve, you're going to have to do it eventually," Braden said. "Starting now makes sense."
Broadband CEO Dan Somers said telephony also has helped AT&T combat churn in some of its major markets, including Boston, Chicago and San Francisco.
In the Boston market, churn rates have been lowered by 40 percent for customers that take the bundle, Somers said. In Chicago — which has the highest telephony penetration among AT&T markets — revenue and cash-flow growth have accelerated at rates higher than the rest of the unit.
The San Francisco Bay Area has the best overall penetration across product lines, reporting 16-percent revenue growth, 21-percent cash flow growth, 63-percent basic cable penetration and more than 100,000 telephony customers.
Despite that growth, Somers said he was disappointed with basic-subscriber penetration, which at 56 percent lags behind the industry average of 63 percent. That will turn around, he added, pointing out that each 1.3-percent increase in basic-penetration growth translates into 1-percent growth in cash flow margins.
"We have turned our sights and our guns on moving this business forward in the second half of this year," Somers said.
All the talk about competing bids also has renewed interest in AT&T's original plan to spin off the Broadband unit into a tracking stock, a move that was postponed when Comcast made its bid.
Farber said that in light of the better quarter, the tracking stock proposal has a better chance, but he still would put his money on a sale of the unit.
"They've got a better chance this week than two weeks ago [of doing the tracker]," Farber said. "But I also think that investors are going to look at the time frame AT&T laid out to get to 40-percent [cash-flow] margins.
"There is still a question whether another operator may be a better fit to do that sooner."
- Continue with its plans to issue a separate tracking stock for AT&T Broadband, originally slated for the fall. The unit would be spun off as a separate, independent company one year after the tracker was issued;
- Accept Comcast Corp.'s bid for the Broadband unit, now at $52 billion in stock and assumed debt;
- Mull a reported offer from AOL Time Warner Inc., which would combine Time Warner Cable and Broadband in a separate company. AT&T shareholders would get about 50 percent of the economic and voting interest of the new company, with AOL Time Warner shareholders getting 45 percent;
- Initiate talks with The Walt Disney Co. Inc. and a pair of MSOs, Cox Communications Inc. and Charter Communications Inc., whom are reportedly preparing a bid.