Comcast's cable colossus
Buyout of AT&T Broadband unit radically alters subscription biz
In the waning hours of Dec. 19, the bleary-eyed board of directors at the telephone giant acquiesced to a $72 billion offer from Philadelphia's Comcast, creating what is far and away the nation's largest cable system.
Bid, which trumped other offers from fellow cablers AOL Time Warner and Cox Communications, puts Brian Roberts, scion of Comcast's cable dynasty, in the chief exec post, and gives the family a third of the voting power in the newly christened AT&T Comcast.
"I give AT&T credit for negotiating the deal strongly, but the Roberts family is clearly in control -- they won the day," says fund manager Mark Mulholland, whose Matthew 25 Fund is an AT&T investor.
"It's a great thing, because I haven't really seen Armstrong as a very good leader recently."
Investors hailed the deal as the best possible outcome in the protracted debate over what do with AT&T's cable system.
However, Washington reacts differently. "Americans should be very worried about how this new combination will affect what they pay each month for cable and Internet service; whether they will be able to fairly access different channels and services; and, more importantly, how this new mega-giant poses risks to our democratic society," Center for Digital Democracy exec director Jeff Chester says.
The deal is certain to be carefully scrutinized by the Federal Communications Commission, which deliberated at length before blessing the AOL Time Warner union.
Built through the acquisitions of Tele-Communications Inc. and MediaOne, AT&T Broadband had a massive footprint of 13.7 million subscribers. But it faced an uncertain future, straining under a multibillion-dollar debt load and experimenting with mixed results in new technologies.
The outlook got even murkier last July, when Comcast filed a $44.5 billion hostile bid for AT&T Broadband. The offer was rebuffed, but it put the cable system in play, and earlier this month, the suitors had lined up once again.
The pot was sweetened by an offer from software behemoth Microsoft to back bids by both Comcast and Cox, with an eye toward slowing the broadband hegemony of AOL-TW.
As part of the Dec. 19 deal, Microsoft will in fact convert its $5 billion debt investment in Comcast into preferred stock in the new cabler, thereby cutting its debt load substantially and increasing Microsoft's potential upside.
Comcast's original offer was widely thought to have created bad blood between Armstrong and the Roberts family (AT&T considered the offer price far too low).
While the parties stepped to the podium like old friends to announce the deal Dec. 20 -- Comcast chairman Ralph Roberts gushed about the prospect of AT&T "even talking to us" -- there may be clashes in the cards.
For the moment, however, the execs are talking up the prospects of the new company's 22 million-strong subscriber base, which is almost double that of its nearest rival, Time Warner Cable.
AT&T Comcast will be cabled up in 17 of the top 20 U.S. markets including Philadelphia, Dallas-Fort Worth, Miami and the San Francisco Bay Area. The company will have a presence in 41 states with roughly 5 million digital video customers, 2.2 million high-speed Internet data customers and 1 million cable telephony customers.
Brian Roberts insisted that the real benefit of the deal will be to expand all those services -- and add new ones to the mix -- in an effort to build high-margin, incremental revenues.
But he admitted that being the biggest dog on the block doesn't hurt when negotiating with programmers, either.
"You get a lot of benefit for this size, and it is an opportunity, as with all kinds of procurement," he said. "When you're purchasing $5 billion in goods and services, can you get a little discount? Sure you can."
But big mergers also bring big debts. Indeed, absorbing the liabilities on AT&T's balance sheet was a major sticking point for all its suitors. The combined AT&T Comcast will owe a staggering $30 billion, or five times its annual cash flow.
Roberts said he hopes to ameliorate the situation in part by selling AT&T's 25.5% stake in Time Warner Entertainment back to AOL Time Warner -- something Armstrong had planned to do anyway but was blocked by legal restrictions during the merger talks.
Execs didn't rule out selling off some cable properties as well, both to raise cash and appease D.C. regulators concerned about market dominance.
