New York -- It may be several months until they actually
walk down the aisle, but the marriage between Comcast Corp. and MediaOne Group Inc.
already has some industry observers putting it above another well-publicized union between
giants -- that between AT&T Corp. and Tele-Communications Inc.
Comcast proposed a $60 billion stock and debt purchase of
MediaOne last week, creating a cable and communications powerhouse with about 11 million
subscribers and more than $8 billion in combined revenue.
"I was a lot more concerned with the AT&T-TCI deal
than this deal," said Thomas Eagan, media analysts for PaineWebber Inc.
"[Comcast] doesn't have the technical questions [that AT&T] had with that
deal."
The $55 billion AT&T-TCI merger, completed earlier this
month, raised some concerns because of the money that AT&T would have to spend to
upgrade TCI's cable systems, estimated by some to be about $12 billion.
But huge expenditures for headend upgrades do not seem to
be in the cards for this merger. According to Comcast, about 70 percent of the combined
company's systems are already operating at 750 megahertz.
By combining with MediaOne, Comcast adds about 5 million
subscribers, most of which are located within or near the Philadelphia-based company's
existing clusters.
According to Comcast president Brian Roberts, 55 percent of
MediaOne's subscribers are located within Comcast's DMAs. The top 20 clusters of the
combined company will have an average size of 454,000 subscribers.
"In one fell swoop, we created the premium
broadband-distribution company in the world," Roberts said at a press conference here
announcing the deal.
The deal brings to Comcast what every cable operator
covets: scale. And with the MediaOne properties, Comcast also gets a growing
circuit-switched telephony business -- with about 10,000 customers in six markets -- as
well as oodles of broadband capacity and a relatively modern network.
And Comcast, a partner in cable-modem service @Home
Network, gets another major player in the high-speed Internet access market -- MediaOne is
a partner in Road Runner, which has about 200,000 subscribers nationwide.
MediaOne also owns a 25.5 percent interest in Time Warner
Entertainment, which includes Time Warner Cable's systems, Home Box Office and the Warner
Bros. movie studio.
Comcast has about 4 million customers in New Jersey;
Connecticut; Washington, D.C.; Philadelphia; and Delaware.
The remaining 2 million customers are part of other
acquisitions by Comcast -- most notably Jones Intercable Inc., the Denver-based MSO with
more than 1 million subscribers -- and of the company's investment in Prime Cable, which
has about 500,000 customers.
The company also has some stellar programming assets,
including controlling interests in electronic retailer QVC Inc., E! Entertainment
Television and Comcast Spectacor, owner of the Philadelphia Flyers National Hockey League
team, the Philadelphia 76ers National Basketball Association club and two sports arenas in
Philadelphia.
"Mass simply makes a difference," MediaOne
chairman Chuck Lillis said at the press conference. "We can be the global broadband
leader. [This deal has] every element that determines the success of this business going
forward."
MediaOne has touted itself as a broadband-services
provider, and it has spent significant amounts of money to increase the capacity of its
network. But while MediaOne's systems are relatively modern -- mainly a result of its
acquisition of Continental Cablevision Inc. in 1997 -- the Englewood, Colo.-based company
has not performed as well as the rest of its cable brethren.
Cash-flow margins at MediaOne have lagged behind those of
the rest of the industry -- about 38 percent, compared with 45 percent for Comcast. But
despite that difference, Comcast is not concerned.
"We do think that one of the opportunities is to have
the margins come up," Roberts said. "We think that this is one of the things
that we can do."
Roberts added that the synergies that are inherent in this
deal can help to boost those margins, including divesting some of MediaOne's noncable
operations and reducing the companies' combined work force, which would total 34,000
people, by about 5 percent.
MediaOne has already retained New York-based investment
banker Lehman Bros. Inc. to dispose of the company's wireless assets, which mainly consist
of stock in AirTouch Communications Inc.
MediaOne's international holdings -- a 50 percent
partnership with Cable & Wireless plc in One 2 One, a British mobile-telephone-service
provider; cable-television and broadband services in Europe and Asia; and a 29.9 percent
interest in Telewest Communications plc, a U.K.-based MSO -- will most likely be divested,
as well.
The new company will retain the Comcast name, and it will
be headquartered in Philadelphia. However, MediaOne will still have some presence in
Englewood.
Brian Roberts will remain president of the new company, and
his father, Ralph Roberts, will remain chairman. Lillis will become vice chairman and a
director of the company.
Many analysts expressed relief that MediaOne ended up in
the hands of a company that has a long and successful track record running cable systems.
"Comcast has such a nice, long history," Eagan
said. "They have shown the ability to take complicated financial situations and make
them work. Although MediaOne management has come around, they have made some
not-insignificant mistakes over the last couple of years."
And though Eagan believes that the price that Comcast is
paying for MediaOne is a little high -- he estimated it at about $4,100 per subscriber --
there was no other way to achieve the scale that this deal brings.
According to the deal, MediaOne shareholders will receive
1.1 shares of Comcast class A special common stock for every MediaOne share that they own,
or $80.16 per share, based on Comcast's closing price of $72.88 March 19. The stock
consideration -- which amounts to about $49 billion -- represents a 32 percent premium to
MediaOne's closing price of $60.75 March 19.
In addition, Comcast will assume about $11 billion of
MediaOne debt.MediaOne has about 668 million shares outstanding. Based on the number of
shares to be exchanged in the deal -- 1.1 for every MediaOne share -- Comcast will issue
about 734 million new shares of stock.
"Comcast management is saying that they believe that
it is worth it to dilute their shareholders in the short term to get to this kind of
size," Eagan said. "The market capitalization couldn't get to this point
otherwise. They are the true market-leader."
Gary Farber, an analyst with SG Cowen Securities Corp.,
added that although the cost is high, Comcast had to act quickly.
"This was a situation where if they didn't do this,
someone else would," Farber said. "These properties, you can't replicate them.
It's not like Comcast was going fishing and it was the only one on the boat looking to
reel this one in."
MediaOne has been the topic of takeover speculation for
months, mainly because it is a large MSO without a controlling shareholder. Potential
suitors for the company have been said to include AT&T and Time Warner Inc.
Ironically, AT&T and Time Warner helped to push Comcast
and MediaOne together.
Roberts said the idea to join came to him while Comcast and
MediaOne were working with Cox Communications Inc. to present a united negotiating front
on a telephony agreement with AT&T.
After realizing how well the two companies worked together
and noticing the proximity of their cable clusters, Roberts said he called Lillis and
said, "We've got to get married."
That set in motion a whirlwind of negotiations, culminating
in a late-night closed-door session where the two parties hammered out a deal.
But like many marriages, there is the potential that one
party could object. That could be Time Warner, which, through the TWE partnership, claimed
that a change in ownership at MediaOne could scuttle the deal.
Although there are still some questions regarding whether
Time Warner has veto power over the Comcast/MediaOne merger -- Time Warner claims that it
does have veto rights, and MediaOne says it doesn't -- it may be a moot point.
At an industry conference here last week, Time Warner CEO
Gerald Levin said he was pleased with the MediaOne merger, and he does not foresee any
problems with the deal.
Levin appeared to leave the door open for negotiation,
adding that he was pleased to see longtime cable veterans like the Roberts family become
part of the TWE partnership.
"I'm happy to have Comcast enter this
relationship," Levin added. "That's a very good thing. It affects everything
that we want to do. If there is a change in control at [MediaOne], the beneficial votes go
away. But none of this is going to happen. This business is based on relationships. I
don't leverage."
Comcast's main bargaining chip could be that this
acquisition removes MediaOne from the picture, thereby allowing Time Warner's telephony
deal with AT&T to move forward.
In February, Time Warner and AT&T agreed to form a
joint telephony venture that would be 77.5 percent-owned by AT&T and 22.5
percent-owned by Time Warner.
AT&T will pay about $300 million for the exclusive
right to provide telephony services over Time Warner's network for 20 years. But MediaOne
has not yet approved the deal.
