Cox Communications Inc. has joined the list of potential suitors for AT&T Broadband, with several published reports claiming the two parties are in talks.
Though sources confirmed that Cox has been talking to AT&T, many are skeptical that the negotiations will result in an actual bid for the unit. According to several analysts, the main obstacle to a Cox-AT&T deal is the potential dilution that such a deal could bring to Cox's largest shareholders.
Privately held Cox Enterprises — which is dominated by the Cox family — owns 67.8 percent of Cox Communications. In the past, Cox family members have been loath to do any deal that would reduce their control of the company. That would be the result of any AT&T Broadband deal.
Because of potential tax liabilities, any potential suitor for AT&T Broadband would have to structure a deal so that AT&T Corp.'s shareholders would control more than 50 percent of the combined entity. That's the way Comcast Corp. — the only openly declared bidder for Broadband so far — designed its $51 billion bid for the MSO, made July 8.
AT&T rejected that bid as inadequate, and particularly chafed at giving Comcast's ruling Roberts family 42-percent voting control of the new company, even though they would own less than 2 percent of the combined entity's stock.
The Wall Street Journal
reported that Cox Communications signed a confidentiality agreement with AT&T, allowing the Atlanta-based MSO access to AT&T Broadband's books. The pact means Cox agreed not to involve a third party in any potential deal.
"If they have signed the agreement, that tells me two things," said one investment banker who asked not to be named. "One, they really believe they can go after [AT&T Broadband] on their own. Or, two, they have no intention of going after them and they just wanted to see what those properties were worth."
According to one source familiar with the confidentiality agreement, it states that potential suitors "will not enter into any discussions, negotiations, arrangements or understandings with any third party with respect to any acquisition or offer or proposal to acquire any of the disclosing party's businesses, affiliates, subsidiaries divisions or assets thereof or beneficial ownership of any of the disclosing party's or any of its subsidiaries' securities."
Comcast has declined to sign such an agreement because of those restrictions. Although sources said Comcast is not yet considering taking on a partner, it doesn't want to limit its options.
"While [AT&T] is taking this run-and-hide approach, it seems very unwise to limit their options," one source close to the matter said.
Adding to the skepticism is Cox's size. With a closing price of $39.43 per share last Thursday, Cox has a market capitalization of $21.3 billion, about three-fifths that of Comcast's $34.4 billion and one-third of AT&T's $64.6 billion.
"I think it would be tough for Cox to do it," said one fund manager who asked not to be named. "They don't have the balance sheet."
Federal Communications Commission cross-ownership rules throw another wrench in a possible Cox-AT&T deal. Those regulations would force Cox to divest the television stations it owns in markets where AT&T Broadband offers cable service.
Cox Enterprises, which owns 67.8 percent of Cox Communications stock, also owns 18 newspapers, 15 television stations and 82 radio stations across the country. Those television stations would butt up against AT&T cable properties in Atlanta, Seattle, Pittsburgh and San Francisco.
Still, one analyst said he would not be surprised if Cox and AT&T are talking, adding that Cox may have the incentive to do a deal.
"It depends how much consolidation you think will be in the sector in the near term," said SG Cowen Securities Corp. analyst Gary Farber. "That's going to be an issue that everybody's going to face.
"If you think that there will be less publicly traded cable companies a year from now, then you're going to be wrestling with this vote and ownership and structure eventually. At least meeting with AT&T, if that's the case, it allows them to assess what the range of options is."
Cox and AT&T are also the only two cable companies that have devoted a significant amount of capital to circuit-switched telephony, a technology that other MSOs — including Comcast — have deemed too costly.
"In terms of telephony, it's putting like minds together," Farber said.
The seriousness of Cox's intentions is likely be revealed by the third week in September, when AT&T's next board of directors meeting is scheduled. That's when AT&T chairman C. Michael Armstrong is expected to brief the board on possible suitors for the Broadband unit.
Armstrong has spent the better part of the past two months trying to find an alternative to Comcast Corp.'s unsolicited $51 billion offer on July 8 for Broadband, meeting with executives at The Walt Disney Co., AOL Time Warner Inc., Microsoft Corp., Cox and others to gauge their interest and wrangle a possible deal. Although nothing definitive has come from those talks, according to one AT&T insider, there is enough interest to put the ultimate fate of the cable unit in question for at least the next several months.
According to sources close to Comcast, the Philadelphia-based MSO is simply biding its time and hoping the AT&T board will reach some kind of conclusion on what to do with the Broadband unit at the September meeting.
"The board has to do something," said one source close to Comcast. "They promised they wanted some kind of restructuring. Either they agree to talk to [Comcast] or let's have an auction."
Although AT&T clearly has other options — including spinning off its cable unit in an initial public offering, or doing nothing and going ahead with earlier plans to issue a tracking stock for the Broadband division and spinning it off as an asset-based company a year later — most observers believe neither of those scenarios will take place.
According to sources, AT&T is under increasing pressure from institutional shareholders to sell off the unit — particularly Capital Research & Management Co., a Los Angeles-based media investment fund which owns about 165 million shares of AT&T stock, or 4.7 percent of its total equity.
According to published reports, Capital Research managers have told AT&T that spinning off Broadband and leaving it in the hands of current management would be unacceptable.
Other institutional investors said to be pressuring for a sale, according to sources, include Fidelity Management & Research Co., which holds about 142 million shares of AT&T and Alliance/Equitable Investment Management Inc., which owns about 35 million shares of the company.