Not So Fast, Comcast


By Ronald Grover It didn't take long for Comcast (CMCSA) to get the answer everyone expected. On Feb. 16, Walt Disney (DIS) said its board unanimously rejected the cable company's hostile $48 billion offer. In its release, the board said it was refusing the bid because the proposed stock merger valued Disney at $3.60 less than the current price of a Disney share.

Does that mean Comcast will quietly go away? Not likely, say those with knowledge of the situation. The Philadelphia-based cable giant had made the Feb. 11 hostile offer because it sensed that support for Disney among shareholders had fallen since mid-January, when the highly regarded animation company Pixar (PIXR) said it was ending its 12-year movie-making relationship with the entertainment company (see BW Cover Story, 2/23/04, "Mega Media Mergers: How Dangerous?"). Moreover, Disney Chairman Michael D. Eisner faces a campaign aimed at his ouster by former board members Roy Disney and Stanley Gold. The issue will come to a head at Disney's Mar. 3 annual meeting -- coincidentally, to be held in Comcast's hometown of Philadelphia (see BW Online, 2/9/04, "2004's Other Election Battle: At Disney").

"BID FROM WEAKNESS." The board's decision, arrived at an all-day meeting at Burbank (Calif.) headquarters, was "basically a no-brainer," says one source with knowledge of the event. Comcast's bid to swap 0.78 of its shares for each Disney share -- which initially valued Disney at $56 billion -- fell in value rapidly as Disney's stock shot up by 14%, and Comcast's shares declined by 6%. "The market is telling Comcast that they don't want this deal," says the source, "why should we?"

Moreover, board members were told by their advisers -- including Goldman Sachs and Bears Stearns -- that the Comcast offer appears to be defensive in nature, made to offset the rising competition it faces from satellite-TV operators and phone companies. "This was a bid from weakness, and frankly we couldn't see all the synergies they were promising," says this source, who adds that Disney sent a letter telling Comcast CEO Brian Roberts that it was rejecting the deal.

Roberts has said Comcast has given guidance of strong growth and that it saw the ability to help boost performance at Disney's struggling ABC-TV network and its animation unit. In a statement released on Monday, Feb. 16, Comcast said its offer "reflects a full and generous valuation based upon Disney's prospects and performance over a long period of time, representing a significant premium over Disney's unaffected share price during any relevant measurement period over the last three years. We maintain the belief that our merger proposal represents a sound and compelling proposition for both sets of shareholders."

SHOW SOME CASH. With the board's rejection, a big question now is whether Disney is in play, with other bidders likely to come into the action. That's considered unlikely, according to analysts and other Disney observers. Possible bidders such as Time Warner (TWX) and Viacom (VIA) could face regulatory issues over combining assets -- like their studios -- with Disney's studio operation. Microsoft (MSFT), which is sitting on more than $54 billion in cash, could make a run at Disney, but why would it want to get into the notoriously fickle entertainment business?

Still, the Disney board is said to feel that a bid that values the company at more than $60 billion -- or more than $30 a share -- could get its interest. But that bid would likely have to include at least some cash. "I don't think this board is interested in trading its stock for another company's stock just for the sake of change," says another source close to Disney. "There has to be cash."

This source also says the board was unlikely to take any action, such as buying another company or loading up Disney with debt to buy back shares, to make it harder for an acquiring company to buy it. That's what Disney did in 1984, when it bought real estate developer Arvida Corp. and brought in friendly shareholders in the Bass family to thwart an attempted takeover by raider Saul Steinberg.

"FIGHTING SHAPE." Instead, this time the board is putting its faith in Chairman Eisner. "The board has confidence in the business, financial and creative direction of Disney under the leadership of Michael Eisner and his management team," it said in its release. "Further, the board expects the company's current structure and strategy will maximize shareholder value."

Is that the end of it? Don't bet on it. Comcast will almost certainly come back with another bid, and it has been said to have talked with Microsoft -- a large shareholder in Comcast -- and others about adding cash to its bid. Of course, Comcast will have to deal with a defiant Disney board and Eisner, who was described by one associate as "in fighting shape for this battle." Let Round 2 begin. Grover is BusinessWeek's Los Angeles bureau chief


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