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AT&T mulls Comcast bid
July 11, 2001: 4:00 p.m. ET

AT&T to give 'serious consideration' to offer but expects sweetened bid
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NEW YORK (CNNfn) - AT&T Corp. is seriously considering an offer by Comcast Corp. to buy its broadband business, AT&T CEO Michael Armstrong said Wednesday, a day after learned the companies plan to discuss the offer.

"While we have no current plans to sell our broadband business, Comcast's offer is serious. And we are giving it serious consideration," Armstrong said in a speech to the Boston Chamber of Commerce. "[The offer] recognizes at least some of the value that we've created in AT&T Broadband. The question is whether it recognizes the right value."

AT&T, the nation's biggest long-distance telephone company, plans to meet with Comcast, the No. 3 U.S. cable provider, to discuss Comcast's unsolicited $44.5 billion bid for the broadband unit, according to a source close to the negotiations.

Philadelphia-based Comcast made its offer Sunday. At $58 billion, including $13.5 billion in debt, it's the largest U.S.-based announced merger since the announcement in January 2000 of the $124.5 billion offer for Time Warner by AOL which formed CNNfn parent company AOL Time Warner (AOL: down $1.58 to $48.60, Research, Estimates).

The combined Comcast-AT&T Broadband would create the biggest broadband communications provider, with about 22 million subscribers and leading positions in eight of the top 10 U.S. markets.

Confirming what learned Tuesday, Armstrong said AT&T would take its time in reviewing Comcast's offer.

"[Before] we can take a position on their offer, we have to make sure that we truly understand it," Armstrong said. "So AT&T's management and board will go through Comcast's proposal very carefully to determine whether it is the best way to achieve our goal of creating long-term shareowner value. That could take some time to do thoughtfully."

AT&T is expecting Comcast to sweeten its $12.60 a share bid, a person familiar with the situation told Comcast announced its $58 billion bid publicly Sunday, notifying AT&T of its intent at the same time that it alerted the media.

The $12.60 a share offer is considered "low-ball" not because of its low value but because of the strategy used, which is seen as an attempt by Comcast to woo institutional shareholders.

"I can't remember when a bid is made public that the people at table didn't get a sweeter offer," the person said.

AT&T has also lined up Goldman Sachs and Credit Suisse First Boston to advise on the deal, sources told

Both Goldman Sachs and CSFB could not be reached for comment.

AT&T (T: down $0.12 to $20.52, Research, Estimates)  shares fell marginally Wednesday after surging earlier in the week, while Comcast (CMCSA: down $0.45 to $38.00, Research, Estimates)  shares were relatively unchanged.

Rejection likely

"I think they should consider the Comcast offer because it's good," said analyst Anthony Ferrugia, of A.G. Edwards & Sons Inc.

Comcast's offer values AT&T Broadband at $12.60 a share which is more than the market currently values the business without the offer, he said. Comcast's management also has demonstrated that they know how to create cash flow and value from cable assets.

"Comcast has the experience and the expertise," Ferrugia said. "As a shareholder I would rather have those assets in Comcast's hands than standing alone and run by a telephone company."

Ferrugia, who does not own any AT&T stock, has had a neutral rating on AT&T shares since 1995. "People are really frustrated and depressed about AT&T and the way it has managed its portfolio of assets," he said.

Armstrong's admission that AT&T will seriously consider the Comcast offer hints that the telephone company is considering selling the broadband business but is waiting for a higher offer.

Comcast has not changed its offer since it publicly presented it on Sunday, a source close to the company told

However, it is unclear whether Comcast will boost its bid.

"Comcast thinks the offer they proposed is compelling for AT&T shareholders," the source said. Comcast is now waiting for AT&T's board to decide what the next steps will be, the source said.

Ferrugia, of A.G. Edwards, would be surprised if Comcast came back with a higher offer because its bid of $12.60 a share is "fairly aggressive," he said.

However, analyst Pat Commack of Guzman & Co. thinks the cable company will return with a $14 a share bid which Comcast could still make accretive even with $1.25 billion in annual savings it expects.  In fact, Comcast could offer as much as $19 a share, and assuming a maximum of $2.8 billion in yearly savings, can still make the merger accretive, Commack said.

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AT&T has to consider the Comcast bid because of its fiduciary duty but has wide leeway. Comcast will face significant hurdles in its bid, which is unsolicited, because they are attempting to buy a division of a company, not a publicly traded stock, Commack of Guzman & Co. wrote in a research note.

In a regular hostile transaction, the acquirer can ask investors to tender their shares of the target but the broadband business does not have shares yet. AT&T plans an IPO of the broadband unit before the end of the year, pending shareholder approval.

The broadband unit, which will trade as a tracking stock, will then be spun off as an asset based security within 12 months, she said. Proxies are being sent out now for voting sometime in September.

"Comcast will have to go door-to-door to investors and state their case," Guzman said.

There is no way for AT&T shareholders to formally vote on the Comcast bid and investors will have to pressure AT&T's board. Comcast could push to have its bid included on the proxies, analysts said.

But AT&T's board will probably reject the $12.60 a share bid though the two parties will likely continue negotiating. "If Comcast comes back and increases their bid, which I think they will, then we have a new ball game," Guzman said.

Second-quarter performance

If rejected at $12.60, Comcast may offer to buy AT&T's interests in Time Warner Entertainment, Cablevision and Rainbow Media and then sweeten its bid for the broadband unit, said analyst Drake Johnstone, of Davenport & Co.

The negotiations may get resolved when AT&T reports second quarter earnings later this month. AT&T is expected to issue an announcement within the next few days, its expected reporting date.

Last year, AT&T Broadband had operating cash flow of $1.9 billion and 22.81 percent margins, Johnstone said.

First quarter margins for the broadband unit were 16 percent which pales next to Comcast's 42 percent. If broadband delivers a solid showing for the quarter, it would strengthen the phone company's hand that it can improve the performance of the business.

"If AT&T has a horrible quarter in terms of cash flow then their institutional investors might pressure them to accept the Comcast deal," Johnstone said.

Both AT&T and Comcast declined to comment. graphic


AT&T to talk to Comcast - July 10, 2001

Comcast makes unsolicited bid for AT&T cable - July 9, 2001




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