Comcast Corp. and AT&T Corp. managed to avoid a meleein their battle for MediaOne Group Inc., fashioning a deal that will put the Englewood,Colo.-based MSO in AT&T's hands and transfer about 2 million subscribers toComcast.
|<p> <strong id="d9e11-2-b">Comcast Gets: </strong> </p>|
Net 750,000 subscribers for about $3 billion, or $4,500 per subscriber.
Option on 1.25 million more subscribers for about $5.6 billion.
Right to manage 1.5 million subscribers in Lenfest Communications Inc. systems.
Favorable terms for AT&T telephony venture.
Breakup fee of $1.5 billion.
MediaOne and several smaller systems.
Access to Comcast customers for telephony.
Much of its own stock from Comcast in system deals.
Total control of Lenfest for $2.2 billion in stock.
The deal ends what could have escalated into an ugly fightfor MediaOne, which, with 5 million subscribers, was considered one of the cableindustry's last remaining jewels. MediaOne said last Thursday that it signed adefinitive merger agreement to sell out to AT&T for about $56.4 billion in cash, stockand assumed debt.
The Comcast deal is a complicated one, involving systemswaps and management agreements for another MSO, Lenfest Communications Inc.
In a separate move, AT&T purchased the half-interest inLenfest it didn't already own for about $2.2 billion in stock.
All in all, Comcast gets a group of highly clustered cablesystems along the lucrative Philadelphia-to-Washington, D.C., corridor, as well as a $1.5billion deal-breakup fee from MediaOne.
AT&T gets the prize it has long coveted: MediaOne. Theaddition of that MSO vaults AT&T to the top of the cable heap and furthers itsstrategy to provide bundled video, voice and data services to a vast number of consumers.
Once the MediaOne deal is closed, which is expected by thefirst quarter of next year, AT&T will have access to roughly 35 percent of thenation's cable customers. Including MediaOne and Lenfest, AT&T will have about16.6 million subscribers, and its cable systems will pass 25 million homes.
Considering the prize, AT&T didn't give up much.According to AT&T Broadband & Internet Services president Leo J. Hindery Jr.,AT&T will part with a net of about 800,000 subscribers upfront.
The other 1.25 million customers will be delivered toComcast over time, and they could be comprised of both existing subscribers and newacquisitions, including Lenfest.
"This is not emasculating at all to the MediaOneopportunity," Hindery said in a conference call with analysts and reporters lastweek. "This will have a very strong and positive impact on our balance sheet. We aredisposing of nonstrategic assets at very effective pricing."
Comcast president Brian Roberts was equally pleased withthe outcome.
"This is a marvelous resolution for Comcast and ourshareholders, as well as for AT&T," Roberts said in the conference call."This is a very elegant win-win outcome."
Roberts added that the deal would increase the size ofComcast's clusters, enabling the company to accelerate the rollout of new services.
SG Cowen Securities Corp. media analyst Gary Farber saidthe deal appears to be quite a coup for Comcast.
"Comcast walks away with a great deal," Farbersaid. "They get more cable customers at a similar valuation [for MediaOne], they geta cable-telephony agreement and they walk away with some cash. They are substantiallybetter off."
Farber added that the deal also shows the intelligence ofboth AT&T's and Comcast's management teams in not wanting to get involved ina bitter, protracted battle for MediaOne.
Insight Communications Co. chairman Michael Willner agreed:"This had the potential [to be a bitter fight]. Level heads prevailed. Everybody gotwhat they wanted."
The fight for MediaOne began last month, when AT&T madean unsolicited $56.4 billion cash, stock and debt bid, besting Comcast's all-stockoffering by an estimated 17 percent. In the time since the AT&T offer, Comcast wasrumored to be pairing with Microsoft Corp. and America Online Inc. to come up with acounteroffer. AOL was then reported to have dropped out of the running early.
Comcast needed to ally with a partner mainly to come upwith a sweeter cash component than AT&T's, which was about $20 billion.
According to one source familiar with the deal, Microsoftand Comcast were deep in negotiations when Hindery made a call to Roberts.
"The call [from AT&T] didn't come untilSunday night [May 2]," the source said. "Sunday and Monday leaves them all goingdown parallel paths. Obviously, on Monday night and Tuesday morning, Comcast decided theAT&T path was the better one to follow."
One sticking point in the negotiations between Microsoftand Comcast was Microsoft's insistence on receiving exclusive rights to providesoftware for digital set-top boxes.
"That was pretty hard to swallow," the sourcesaid. "The notion of exclusivity is a tough concession to accept as anoperator."
In contrast, AT&T and Comcast were able to hammer out acompromise at a lightning-fast pace, complicated by the fact that AT&T was negotiatingwith Microsoft and Lenfest at the same time.
Microsoft agreed May 6 to invest about $5 billion inAT&T stock and to expand a previous relationship with AT&T to provide software fordigital set-top boxes in between 2.5 million and 5 million cable homes. That deal is notexclusive.
Hindery, AT&T chief financial officer Daniel Somers andRoberts hunkered down for a series of closed-door, round-the-clock meetings until anagreement could be reached, the source said.
What resulted from those discussions was a complicated dealthat will bring Comcast about 750,000 to 800,000 subscribers in markets in Michigan;Naples, Fla.; New Jersey; Baltimore-Washington, D.C.; and New Mexico. Comcast has agreedto exchange systems in Pittsburgh; Richmond, Va.; Atlanta; Sacramento, Calif.; BrowardCounty, Fla.; Chicago; and Colorado, as well as about $4,550 per subscriber, or between $3billion and $3.5 billion.
Comcast also received the right to purchase another 1.25million subscribers from AT&T at the same $4,550-per-customer price, or $5.7 billion.
And Comcast gets to manage systems with about 1.5 millionsubscribers in Pennsylvania and New Jersey formerly owned by Lenfest.
The addition of the Lenfest properties may have made thedeal too good to resist for Comcast. By getting management control of those systems,Comcast essentially consolidates the Philadelphia market -- its hometown -- and it gainsaccess to other properties near its own major mid-Atlantic clusters.
Bear, Stearns & Co. analyst Raymond Katz noted that thedeal makes Comcast the dominant operator in the mid-Atlantic region, especially when theLenfest properties are added to the mix.
"Lenfest is the 'hole in the donut' of[Comcast's] mid-Atlantic supercluster," Katz wrote.
Comcast has had its eye on the Lenfest systems for a while,and it was close to landing a deal with Lenfest chairman H.F. "Gerry" Lenfest,but the deal fell through.
That falling out also created some bad blood betweenLenfest and the Roberts family -- so bad that many analysts believe a deal between the twocould not have happened without a third party.
Although Comcast will only manage the Lenfest systems, manyanalysts believe Comcast will eventually gain control of the company as part of theAT&T agreement.
Comcast can finance the deal in several ways: by exchanging26.6 million shares of AT&T stock it already owns as a result of its 20 percentinvestment in Teleport Communications Group, a private-line telephony carrier purchased byAT&T in 1998; through issuing its own nonvoting class-A shares; or through acombination of its own shares, AT&T shares and shares it owns in At Home Corp. (parentof @Home Network).
Aside from the additional subscribers -- which could boostComcast to more than 8 million customers once all of the deals go through -- Comcast alsogets favorable status in a future telephony deal with AT&T. That piece will kick inafter two other non-AT&T-affiliated MSOs reach similar telephony agreements withAT&T.
That part of the deal was of utmost importance to Comcast,as it had feared it would receive less-than-stellar terms compared with Time Warner Inc.,which is in the middle of closing a 20-year telephony agreement with AT&T.
"That was a huge plus for Comcast," said thesource, who asked not to be named. "Brian Roberts had been looking for ways to do adeal with AT&T, but it didn't sit well with Comcast to be treated in a way thatwas not as good as what someone else might get."
Time Warner is in the middle of closing a 20-year telephonyagreement with AT&T. The Comcast/AT&T pact does not assure that a Comcasttelephony deal will be better than Time Warner's -- it just won't be worse.
"Comcast will be on a parity with Time Warner,"AT&T Broadband executive vice president of wireline telephony Gerald DeFrancisco said.
Another MSO -- Cox Communications Inc. -- is separatelynegotiating a telephony deal with the long-distance giant.
Cox had been part of a consortium, also including Comcastand MediaOne, that was planning to jointly negotiate with AT&T. But while thattriumvirate has been disbanded, Cox does not believe the Comcast deal will have any effecton its future telephony negotiations.
Cox spokeswoman Amy Porter said her company has beenpursuing its own circuit-switched digital-telephony strategy with about 42,000subscribers. And although it is looking for other telephony partners, signing a deal withAT&T is not as critical to Cox as it is to other MSOs.
"We continue to look for other [telephony]partnerships," Porter said. "This [AT&T/Comcast agreement] doesn't makeus any more or less likely to do that."