Comcast, AT&T cable deal to create Net giant

The $72 billion merger is expected to create a cable powerhouse that will also be a leading provider of broadband Net access.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
6 min read
After months of corporate tire-kicking, AT&T Broadband, the biggest cable company in the United States, has decided to merge with original suitor Comcast.

The $72 billion deal would create a cable powerhouse, with more than 21 million subscribers and access to about 38 million households. That reach would help the new company take on the local telephone companies with renewed vigor in offering both telephone and high-speed Internet services over cable wires.

But it may also further confuse the fragmented cable broadband Internet business, in which millions of Excite@Home subscribers are being shunted separately to AT&T Broadband and Comcast. The two companies had separately been building networks to replace Excite@Home's systems.

Whatever the outcome of the merger proposed Wednesday, it will almost certainly establish the new company--to be called AT&T Comcast--at the top of a telecommunications food chain that has seen considerable flux as numerous companies have shuttered or merged.

AT&T CEO C. Michael Armstrong sees the broadband unit and Comcast accomplishing more together than they could alone. "There is no question in my mind that this bundle works in the market and works in the bottom line," Armstrong said in a conference call Thursday.

Investors aren't quite so sure. In trading on Thursday, AT&T closed up $1.05 to $17.85, a gain of just over 6 percent. Comcast was down $2.44 to $35.65, a loss of more than 6 percent.

Still, analysts said the deal is a positive one for Comcast, even at a price significantly higher than its original offer.

"The deal represents an outstanding strategic fit" for Comcast, wrote Salomon Smith Barney analyst Niraj Gupta. "AT&T Broadband has the best clusters in the industry, providing scale for launching new services (content, interactive TV, for example) and dramatically enhanced long-term advertising growth prospects."

Cable industriousness
The deal closes another chapter in Armstrong's efforts to reshape the cable, telephone and broadband Internet landscape during the past few years.

see roundup: AT&T breaks up Armstrong re-created AT&T as the biggest cable company in the country with back-to-back buys of Tele-Communications Inc. and MediaOne. But the debt he amassed in spending more than $100 billion on the two companies finally helped to destabilize the phone giant, ultimately prompting a breakup plan that would have split the telephone, cable and wireless phone businesses into separate companies.

Wednesday's deal modifies that plan. The wireless business has already been spun off as an independent, publicly traded company. The cable business will now be merged with Comcast, although AT&T shareholders will control 56 percent of the stock and have a 66 percent voting interest in the combined entity.

Armstrong will be chairman of the new cable behemoth, and Comcast CEO Brian Roberts will be the new company's CEO.

That leaves the final pieces of AT&T--business services and consumer telephone divisions--hanging. The company has previously said the consumer division will still be spun off as its own tracking stock, but many analysts speculate that a Baby Bell might eventually buy the business services division or both. The company held merger talks with telephone companies including BellSouth earlier this year.

Comcast first bid for AT&T this summer, offering $44.5 billion for the assets. At the time, AT&T dismissed the bid as too low and invited other bids.

Those bids took considerable time to evolve, and ultimately AOL Time Warner and Cox Communications were in the running. But at a meeting Wednesday, AT&T's board of directors unanimously decided to accept a revised Comcast offer.

The purchase price had been improved for several reasons, Roberts said in an interview on CNBC. The new deal now includes AT&T's 25 percent stake in AOL. But AT&T Broadband has also done a better job of bringing its financial margins closer to the industry standard, he said.

The new price boosts the value of the deal by almost $200 per subscriber, said CIBC World Markets analyst Jeff Wlodarczak, who called the new price "a testament to an effectively run auction process."

see Special report: Cutting the cable AT&T Broadband, which inherited outdated infrastructure from TCI, has historically seen low margins and low subscription rates for its advanced services such as digital cable and Internet service. It has focused heavily on improving its aging network for the last several years.

Roberts pinpointed several reasons why Comcast was so intent on the buy, painting a picture of a company evolving well beyond its cable roots.

AT&T has spent considerable time building up its ability to offer telephone service over the cable network; the original reason Armstrong was interested in the cable business was for the purpose of competing with the local phone companies' dominant networks.

Taking on the phone companies
With a reach of 30 million households, AT&T Comcast can bring its own local phone service to a level that can compete with the powerful local phone companies, Roberts said.

"We are particularly excited about the telephony prospects," Roberts said. "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."

Steve Burke, president of Comcast Cable, said in Thursday's conference call that introducing phone services to Comcast customers could generate $600 million to $800 million annually within the next five years.

"If we overlay their expertise, their investment, their people and learning, and roll out telephony to our footprint, it could represent a very significant opportunity," he said.

AT&T's own cable telephony business has been modestly successful. As of the third quarter of 2001, the company had 924,000 customers, up from 324,000 the year before. The company drew quarterly revenue of about $104 million from the business that quarter.

The companies initially had little to say about the cable Internet business, which is in the greatest period of flux it has seen since its inception. Together they have about 2.2 million broadband subscribers.

AT&T Broadband is in the midst of relocating 850,000 Excite@Home subscribers to a parallel network that it built at fever pace during the past few months. That network draws on the resources that AT&T's cable business already had in hand, such as the cable lines themselves and network operations centers.

see special coverage: Complete coverage of Excite@Home troubles But it also uses network elements that belong to AT&T proper, such as a primary backbone for hauling data over long distances. Comcast, meanwhile, is in the process of creating its own new network for its Excite@Home customers, with plans to move customers early next year.

"We built a contingency network in the event that @Home shut us off, which they did, and Comcast did same thing. We will ultimately integrate those two networks," Bill Schleyer, CEO of AT&T Broadband, said Thursday. "Never again will we be put in position where someone shuts off our customers."

Schleyer said that the new network will be designed to support multiple Internet service providers.

A merger of this magnitude, coming after the Excite@Home debacle, could help shore up the broadband cable industry, analysts said.

Gartner analysts Patti Reali, Jay Pultz and Alex Winogradoff say that with the merger, Comcast will gain nearly nationwide cable coverage, plus telephony and cable facility challenges, and AT&T will rid itself of a major distraction and become an acquisition target.

see commentary

"The deal is broadly positive for the group because it should remove much of the uncertainty that has overhung it; it could yield massive industry rationalization; and it could herald more consolidation," wrote Banc of America Securities analyst Douglas Shapiro.

As the merger deal is unlikely to close until near the end of 2002, those two networks will have to be up and running for some period of time before they are merged. Executives predicted they would need about nine months of regulatory and shareholder scrutiny.

This is one issue that will likely be in the purview of a team appointed to deal with transition issues on both sides. That team will include Comcast Cable President Steven Burke, AT&T Chief Financial Officer Charles H. Noski, AT&T Broadband CEO William Schleyer and Comcast Executive Vice President Lawrence Smith.

In the background of the deal sits Microsoft, which agreed to turn the $5 billion in debt financing it gave AT&T Broadband several years ago into a simple equity stake in the new company. That was a key part of the deal, as AT&T's massive overhang of debt had been a sticky point. The merged companies will still retain about $23 billion in debt, executives said, but will have a considerably better debt-to-earnings ratio than AT&T Broadband itself.

Microsoft's huge investment in the cable giant has not given it much of an advantage in the past, however. AT&T Broadband originally did agree to try out Microsoft's interactive TV software, but ultimately switched emphasis to competitor Liberate Technologies' products. The cable company has not made final decisions about interactive TV plans, however.