Comcast Wins War for AT&T Broadband

The new AT&T Comcast Corp. will be the largest cable company in the U.S., and will serve voice, video, and data. Analysts forsee even more consolidation in the cable industry.

by Erin Joyce and Thor Olavsrud of internetnews.com [December 21, 2001]

Number three cable company Comcast Corp. (NASDAQ:CMCSA) has won the bidding war for the broadband/cable unit of AT&T (NYSE:T) in a $72 billion merger deal that would create the world's largest broadband services company serving more than 22 million cable subscribers.

The new entity, to be named AT&T Comcast Corp., launches a new era for the Philadelphia-based Comcast, whose origins trace back 38 years ago to Tupelo, Miss., and just over 1,000 cable subscribers.

The new AT&T Comcast Corp. will have a presence in 17 of the country's 20 largest metropolitan areas and in 41 states overall, with five million digital video customers, 2.2 million high-speed data customers, and one million cable telephony customers.

Comcast had started the bidding war with its hostile $44.5 billion offer for AT&T Broadband in July after the phone giant said it would spin out the cable/broadband division, essentially putting it in play.

By fall, Comcast, cable provider Cox Communications (NYSE:COX) and media giant AOL Time Warner (NYSE:AOL) had submitted competing proposals for merging their cable operations with AT&T's, with Microsoft Corp. (NASDAQ:MSFT) willing to help the Comcast and Cox bids against its rival AOL Time Warner.

But by upping its offer and addressing other outstanding issues such as voting rights, Comcast has prevailed in its quest to merge its subscriber base of about 8 million with AT&T Broadband's base of 14.3 million subscribers.

The approved merger agreement includes about $47 billion of new stock that Comcast said it would issue to AT&T shareholders. Comcast also said it would take on $20 billion in AT&T debt, as well as $5 billion in convertible debt that Microsoft Corp. holds, which will be exchanged for 115 million shares in the new company. The terms would place the aggregate value of the deal at $72 billion.

Under the agreement, AT&T shareholders will own a 56 percent economic stake and about a 66 percent voting interest in the new company. The Roberts family, which owns Comcast Class B shares, will control one third of the new company's outstanding voting interest. It also includes AT&T's 25.5 percent interest in Time Warner Entertainment, which is part of AOL Time Warner's empire.

C. Michael Armstrong, AT&T's chairman and chief executive, is expected to serve as chairman of the new company. Comcast's President Brian Roberts is to become the chief executive of AT&T Comcast, which will be headquartered in Philadelphia.

In the wake of the Telecommunications Act of 1996 that ushered in an era of upstart telecommunications providers, AT&T had set out to remake the company into four divisions: business services, consumer services, broadband and wireless, in order to position for the new era of Internet Protocol (IP) communications services, Armstrong said.

During a press conference Thursday, Armstrong said he was satisfied with the outcome of a strategy he launched some four years ago to build video, voice, and data transmission services into one infrastructure. To that extent, he said AT&T and Comcast were aligned on pursuing that vision in the merged company.

"We had to establish three new businesses," he said. "One of those was broadband."

The reason the company spent upwards of $100 billion assembling its cable operations wasn't to just offer broadcast analog video entertainment business, he said. "It was because that infrastructure could be transformed into a fiber optic infrastructure and on that we could deliver the full suite of services: voice, video, and data."

Armstrong, a veteran of data networking from his years with IBM, as well as with wireless and satellite technology from his tenure at Hughes Electronics, said the merger would help drive the very first principal of making money with networking: utilization.

"The operator who gets the most utilization would have the lowest unit costs and would derive the best return on investment. By bringing all three of those businesses (voice, video, and data) to this infrastructure, we ought to be able to accomplish that.

"Today is a reaffirmation of what we set out to do."

Roberts added that he was particularly excited about the telephony prospects in the merger. "The size of our telephony footprint, combined with AT&T's expertise and leadership in the telephony space, will enable us to accelerate the deployment of telephone services to many new markets."

The merger of AT&T Broadband and Comcast is also subject to regulatory review, as well as approval by both companies' shareholders and other conditions. On the regulatory front, some analysts see the combination as the least problematic for anti-trust scrutiny. More troublesome for the smaller players who didn't make the cut in the bidding is how they will compete with AT&T Comcast.

GartnerG2's research analyst Laura Behrens said with federal regulators expected to continue loosening long-standing ownership caps among broadcast providers, the deal isn't likely to face difficult anti-trust scrutiny.

But the merger puts more pressure on cable providers who "feel that they need to get much bigger to survive."

To that end, expect more consolidation in the industry, she said. "The niche players are going to have a hard time surviving."

For Brian Roberts' father Ralph, the CEO of Comcast who built the company's business from scratch starting in 1963, the press conference was an opportunity to point out "a remarkable story of American business." He talked about how a former "acorn" of a company had grown to now partner with the largest corporation in America.

"The technology of course is the greatest boost in the world, and we happened to be in the right place at the right time," the elder Roberts continued. "The story here is remarkable."

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