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Comcast President Brian L. Roberts couldn't have hoped for a more receptive audience. Stung by a the AT&T (T
) board's rejection of his offer to acquire the telecom giant's cable assets, Roberts swept into New York on July 9 to present the $41.3 billion plan directly to AT&T investors. "We fit like a glove with AT&T," Roberts said to a room packed with 500 investors on the top floor of the St. Regis Hotel. The audience, along with some 1,500 others listening in via conference call, obviously agreed. AT&T's stock jumped 8% the following day. "The surprising thing about the meeting at the St. Regis was how much support Roberts had," said one AT&T investor who was there.
The question is whether Comcast Corp. can turn that support into victory. AT&T Chairman and CEO C. Michael Armstrong appears dead set against a deal--and for now, the board looks as if it backs him. Says Armstrong in his first extended interview since news of the bid broke: "We're under no obligation to sell Broadband." But if Comcast and Roberts prevail, as it looks as though it might, the upstart cable operator will in one swoop transform the dynamics of the fledgling broadband industry even as it deals a near-death blow to AT&T.
Already, AT&T's fast-growing wireless unit has been spun off. Without the future growth engine of cable to pull along the rest of its remaining empire, the telecom giant's core long-distance and business-services units would be left severely weakened--and right back where they started a decade ago. "The telephone business may be too small to survive on its own," says Jim Bitter, a telecom analyst at Wilmington Trust Corp. (WL
), which holds about 500,000 shares. "Now, it looks like you could see the disappearance of this American icon very quickly."
It's not just AT&T's future that's at stake. The embattled Armstrong looks increasingly vulnerable. He now runs the very real risk of losing control of his weakened empire. With the cable unit in play, rumors are swirling about possible bids by every industry player from AOL Time Warner Inc. to Paul Allen's Charter Communications. Sources say Walt Disney Co. is also considering a counter-offer with other content producers. And though Liberty Media has said it will not bid, industry insiders know never to count out John Malone. And with AT&T Broadband on the table, the opening has other opportunistic investors eying the rest of the once-mighty corporation.
Selling off AT&T bit by bit is a scenario Armstrong adamantly rejects. He insists that, with or without its cable assets, the company has a bright future. "Let's talk about the end of AT&T," says Armstrong. "You're not going to end something that has a strong and growing business. The brand will survive."
Outside the corridors of AT&T's Basking Ridge, N.J., headquarters, though, most people think the battle has clearly been joined. And if AT&T as we now know it fades away, its demise will likely be just the start of a wave of consolidation that could rip through the cable and telecom industries around the globe. In the U.S., relatively strong Baby Bells, such as SBC Communications or Verizon Communications, could snatch up troubled WorldCom (WCOM
) as well as parts of AT&T. Remaining midsize cable operators, such as Charter and Atlanta-based Cox Communications Inc. (COX
), could rush to embrace each other. In Europe, wounded giants Deutsche Telekom (DT
) and British Telecommunications (BSY
) will likely be picked over for their broadband assets. Investors such as George Soros and Hicks, Muse, Tate & Furst Inc. have already started buying smaller distressed carriers at discount prices. "AT&T is just the beginning," says Francis McInerney, a partner at consultant and investment firm North River Ventures. "We'll see value investors pick up a large number of telecom assets around the world during the next 6 to 12 months."PHILLY POWER. For Comcast, a successful deal would elevate a family-controlled business in Philadelphia to the top tier of media and communications giants. The new company would be nearly triple the size of the current Comcast. That would make it the country's largest provider of cable TV and cable-modem service by far. Its sheer bulk would give Comcast enormous influence over TV, media, and the Internet. It would be able to compete with AOL Time Warner and Microsoft Corp. for high-speed Internet-access customers. And it could use its expanded cable network as a platform for advanced digital TV services, such as e-commerce and instant messaging. "Everybody in cable and satellite now has to be asking themselves: `Is this kind of dominant size necessary to be in this business?,"' says John B. Frelinghuysen, a media consultant at Booz, Allen & Hamilton Inc.A LOWBALL OFFER. An AT&T-Comcast deal could provide a clear benefit for consumers by speeding the rollout of broadband services. With operating margins more than twice AT&T's anemic 19% margins, Comcast will be in a better position to subsidize efforts to offer telephone and broadband services. And the economies of scale generated by the new company would create cost savings that might help pay for speedier upgrades of homes. Moreover, by having a cable footprint in 8 of the top 10 markets where consumers have shown a willingness to pay for broadband services, a combined AT&T-Comcast would be able to focus sooner on creating an array of new services to go over the upgraded broadband lines.
For now, the Comcast bid is the only one the table. But that could change quickly. Cox has hired Salomon Smith Barney to help assess an offer. Disney, concerned that consolidation of cable companies could block its programs from reaching TV audiences, is scrambling to put together a consortium of other programming companies to make a counterbid, sources say. Neither Disney nor Cox would comment. But whether it's Disney or some other company that steps forward, a counteroffer is clearly in Armstrong's interest. That may be the proud CEO's only chance of securing more than a token higher price--not to mention a face-saving exit strategy.
How much are AT&T's cable assets worth? Clearly, Comcast has lobbed a lowball offer--roughly $4,000 per subscriber. Sources say AT&T is unlikely to consider anything below $5,000 a person. That would add $13 billion to the purchase price, for a total of $67 billion, including debt. A key player in negotiations will be Liberty Media CEO John C. Malone, who stepped down from the AT&T board on July 10. Malone is still a force even off the board. He owns 25 million shares of the stock and quit the board with a letter to Armstrong calling Comcast's bid "inadequate." Other investors agree. The price should be about 20% higher, says Richard F. Lawson of Wallace R. Weitz & Co., which is among AT&T's largest investors, with 13.3 million shares.
Price aside, investors seem to want the Roberts family in the corner office. Most view Comcast as far better managed than AT&T's unit. "AT&T is in a very tough position if it wants to try and demonstrate that these assets would be worth more under AT&T management it's a nonstarter," says fund manager William C. Nyregn of Harris lp Associates, one of AT&T's 20 largest shareholders, with 18 million shares. The fallout from the Comcast bid may include the job of AT&T Broadband CEO Dan Somers. When asked if he would consider changing management at Broadband, Armstrong replied: "No comment."
So how do things proceed from here? AT&T's board will consider the Comcast offer during a meeting on July 17-18 in Denver. AT&T says it may spend as much as several weeks reviewing it before making a decision; meanwhile, the board is clearly waiting for other bids to materialize. But if Comcast agrees to up the price and meet AT&T's other conditions, even Armstrong may have trouble opposing a deal. Aside from price, AT&T objects that there's no protection for investors if Comcast shares fall too low and that no cash is involved. Another stumbling block: Comcast would control 49% of the voting stock.
One way or another, it seems likely that AT&T Broadband will soon slip out of Armstrong's grasp. Where will that leave him--and what will be left of AT&T?
About the only upside of such a development would be that $13.5 billion of its crushing $47.5 billion in debt would shift to Comcast. But AT&T would be deprived of its best growth engine during an extremely weak market for telecommunications.
Still, Armstrong insists that AT&T has a bright future. He says sales of data and consulting services to businesses are growing an average 20% a year. Later this year, he expects revenue from these operations to exceed the sale of long-distance phone service to businesses. And even though the consumer long-distance unit is shrinking fast, its margins still exceed 30%.
That may be, but it is a far, far cry from the brave new world Mike Armstrong wanted to build. By Steve Rosenbush, with Tom Lowry, in New York, Ron Grover in L.A., and Amy Barrett in Philadephia