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University of California's professor Michael Noll
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Monday, 9 July, 2001, 20:21 GMT 21:21 UK
Comcast's AT&T bid: Blessing or curse?

By BBC News Online's Jorn Madslien.

Willingness by the US cable TV company Comcast to fork out $58bn to merge its operations with its competitor AT&T's broadband division has renewed hopes for the future of fast internet access.

"Inherent in this transaction is a lot of growth," CIBC World Markets analyst Jeff Wlodarczak told BBC News Online, pointing to Comcast's strong track record of buying then turning around underperforming companies.

The deal is a clear attempt by Comcast to buy its way to the top.

The company proposes to issue $44.5bn worth of new shares as payment. In addition, it will take on $13.5bn of AT&T's debts.

If the deal is completed, Comcast would become the world's largest broadband communications provider with 22m subscribers and a leading position in eight of the 10 largest markets in the US, Comcast said in a statement.

"The industry has been making promises for years and it seems they're finally beginning to deliver," said an excited Mr Wlodarczak, predicting that the deal will be completed by the middle of 2002.

Reluctant response

That prediction comes despite AT&T's apparent reluctance to accept Comcast's offer.

AT&T has spent $100bn during the last few years building up its broadband division, mainly through acquisitions of cable companies, so selling it cheap is not a tempting option.

"AT&T, clearly, is taken aback. Something they paid $100bn for, they'll only going to get $58bn for," said Professor Michael Noll at the University of California in an interview with BBC World Service's World Business Report.

However, AT&T may not have much choice.

Takeover target

The group's share price has slid from highs of more than $60 to about $20 over the last couple of years, making the whole group - not just the broadband division - undervalued and ripe for acquisition bids.

Observers say it was its broadband acquisitions that led to the share price's collapse.

"If you or I or anybody else made a mistake like this in anything we did in our life or our business, we'd be fired and suffer the consequences," said Professor Noll.

"They overpaid to acquire it, they did so because they thought they could deliver telephone service over this broadband.

"This hasn't worked out technically or financially for them. And it moved them into the entertainment business, of which they know nothing," he said.

"To get out of this and get something for their shareholders is clearly a good deal," he said.

Window of opportunity

Comcast is eyeing a future where it could hold a dominant position in the US cable TV market, serving one in three viewers.

It is a move that would normally run the risk of being blocked by the regulator.

However, this bid comes soon after a recent US court decision that overturned federal limits on the market share any one company can have.

Comcast appears to have dived in to get a deal underway before new limits are proposed later this summer by the Federal Communications Commission (FCC).

The FCC could issue a warning that the deal would be subject to the new rules, but this is unlikely to happen even though there may be some consumer "watchdogs throwing up the red flags", Mr Wlodarczak said.

Fair price?

AT&T has long had plans to restructure its business by splitting it into three companies with four separate listings, broadband being one of them.

This means AT&T broadband would soon be for sale anyway.

Now, AT&T's shareholders will have to decide which management team is more likely to deliver margin improvements, and where can they get the best price for the company, a research report by Sanford Bernstein said.

Analysts disagree on whether the price offered by Comcast is fair.

Sanford Bernstein believed the price was fair, while Professor Noll deemed the bid excessive.

"They're paying more than $4,300 per cable subscriber. That's a lot of money," he said.

However, Condor Capital portfolio manager Brian Slater, describing the Comcast bid as "a little light".

"The purchase price, I'm pretty sure, may be renegotiated a little higher because AT&T spent $100bn to acquire those assets," he said.

The market consensus seemed to favour the Comcast bid to a stock market float this autumn, with AT&T shares rising.

Comcast's shares fell as investors feared the stock issue would dilute its value.

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09 Jul 01 | Business
Cable giant bids for AT&T Broadband
20 Apr 01 | Business
BT 'to ditch AT&T venture'
29 Jan 01 | Business
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