Patience Is A Deal-Making Virtue For Comcast

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Sometimes when you lose, you win. Comcast Corp. found that out in 1999, when after stepping aside in the bidding for MediaOne Group Inc. — in favor of AT&T Corp.'s AT&T Broadband division — it walked away with a $1.5 billion break-up fee, plus the right to buy about 1 million cable subscribers from the telephone giant. At the time, Comcast's decision was touted as an effort to extract a win-win situation over what could have turned out to be an industry-splitting battle for the Denver MSO.

Comcast took the high road and just two years later shocked the industry with an unsolicited bid for all of AT&T Broadband.

Comcast's unsolicited offer for Broadband in July 2001 touched off a seven-month bidding war that included some of the heaviest hitters in the media industry, including AOL Time Warner Inc., Cox Communications Inc., Microsoft Corp. and The Walt Disney Co.

But Comcast president Brian Roberts came out the winner, engineering a deal that will lessen his family's equity stake in the combined company, but will put them firmly in control of the new entity — AT&T Comcast. The Robertses will own about 33 percent of AT&T Comcast after the transaction closes, which is expected soon.

Eased debt burden

In swinging a deal for the largest MSO in the country — and one of the most heavily leveraged — Comcast will not assume a crushing debt load. Comcast has constructed a series of financial transactions that will enable it to swap debt of about $11.8 billion. Microsoft Corp., which had about $5 billion in AT&T Broadband convertible notes, agreed to swap that debt for stock when the deal was announced last December.

In the process of emerging as the new leader of the cable industry with a 22-million subscriber powerhouse, Roberts also has managed to salve some bruised egos along the way, including that of current AT&T Corp. chairman C. Michael Armstrong, who will become chairman of the new company.

Free cash flow gains

But the AT&T deal isn't the sole reason Comcast is the winner of this year's Innovator Award for Business Strategy. The company has reported strong numbers, even in the midst of a meltdown in cable stocks this year, and has been one of the more consistent performers in the market.

While other MSOs have eased off on digital-subscriber growth — instead focusing on marketing digital only to new customers — Comcast has seen steady increases in digital.

And aside from dramatically buttressing its base of clustered systems through the AT&T Broadband merger, Comcast is rolling out an extensive video-on-demand play in its home market of Philadelphia and is poised to enter the voice-over-Internet-protocol arena early next year

Comcast had been the only publicly traded MSO to report free cash flow — cash flow once interest and capital expenditures are made — registering $262 million in the third quarter. Through the first nine months of the year, Comcast said it generated $660 million in free cash flow and is on track to finish the year with between $800 million and $1 billion in free cash flow.

While that likely won't continue in 2003 following the consummation of the AT&T merger — mainly because of additional capital needed to upgrade systems — Comcast expects the full company to be free cash flow positive by 2004.

SunTrust Robinson Humphrey cable analyst Gary Farber was impressed by Comcast's consistent financial performance, and added that it has been one of the best deal makers in the industry.

"Probably what has been one of the under-appreciated things about this story is that over the last couple of years they have a strong track record in doing accretive deals," Farber said.

It's a long list, including the 1998 purchase of 40 percent of Jones Intercable Inc. via a share acquisition of the MSO from Bell Canada and Jones CEO Glenn Jones — Comcast bought the other 60 percent a year later in a stock deal valued at about $3 billion. The deal gave Comcast another 1.1 million subscribers.

Also noteworthy was its acquisition of Viacom Inc.'s two-thirds interest in regional sports network Home Team Sports last year for $150 million in cash. Although that deal was held up by Fox Sports Networks, which owned the other third and sued Comcast and Viacom over the deal, Comcast wound up with 100 percent of HTS by swapping its interest in Midwest Sports Channel for Fox' remaining piece of HTS.

Then last year, the company finalized a deal with Fox Cable Networks Group in which Comcast gave up its interest in Speedvision in exchange for control of The Golf Channel and Outdoor Life Network.

Comcast executive vice president and treasurer John Alchin said that his company hasn't always been praised for the deals it has done.

"One thing we have done consistently is to try to take a longer-term view of what we're looking at," Alchin said. "The [Home Team] sports deal, we took a lot of grief for that, but we've been able to build the foundation for a regional sports network. But the initial reaction, even though we didn't spend a lot of money, wasn't all that great."

Alchin also pointed to Comcast's decision to buy QVC in 1994 as an example of the Roberts family's vision.

"The reaction when we acquired QVC was brutal," Alchin said. "But Brian and Ralph [Roberts] saw an opportunity to build a content strategy on the back of that that has grown into a valuable part of the company."

Alchin added that QVC is generating about $720 million of cash flow, or about three times what it generated in 1994.

"When we did the deal it looked to many investors like a strategy that was divergent with a fairly pure-play cable deal," Alchin said. "It's paid dividends."

Prudent non-deals

Farber also pointed to the deals that Comcast didn't make as an example of the company's financial acumen. Topping that list is the MediaOne deal. Another example is Comcast's decision not to take its iQVC unit, the online division of its QVC Inc. shopping network, public at the height of the Internet boom.

"Within this industry Comcast probably has the best track record of cutting deals," Farber said. "Even the ones they haven't made."

Although Farber said the acquisition of AT&T Broadband will present integration challenges for Comcast, the company appears up to the task.

"They have a lot of challenges ahead," Farber said. "But generally they have outperformed as far as the expectation of the type of financial deals they have made. Probably the biggest one — AT&T Broadband — is the one that will redefine the company."