Comcast fires $66 billion takeover salvo

This article was updated at 7:44 p.m.

NEW YORK — Comcast chairman Brian Roberts — he of the velvet glove and the iron fist — Wednesday publicly offered to buy Walt Disney for $66 billion, going over the head of Michael Eisner after the Mouse chairman-CEO blew him off in a private telephone conversation earlier this week.

A merger could realign the media stars, creating another vertically integrated behemoth like News Corp. and Time Warner. It would ally Disney’s content assets like ABC and ESPN with 21 million-plus subscribers of the nation’s largest cable operator.

And it would resolve Eisner’s increasingly awkward tenure at the helm of Disney, handing the reins to former 12-year Mouse veteran Steve Burke, Roberts’ No. 2 man.

At the very least, Comcast’s move formally puts the Mouse in play; but with no other players, like Microsoft and Viacom, willing to step up to the plate, Eisner would have to seek a white knight to help his cause.

A combined Comcast-Disney would boast a market cap of about $125 billion, $45 billion in revenue, cash flow of $10 billion and 180,000 employees worldwide.

The $66 billion offer includes the assumption of $11.9 billion in debt and is based on Comcast’s closing stock price on Tuesday.

One Walt Disney shareholder immediately sued the company in Delaware Chancery Court to force it to consider the offer. But the bid, Wall Streeters agree, would have to be quite a bit richer for a real dialogue to commence.

The Mouse will likely engage Comcast on some level. But it’s likely that Eisner, with at least some of his board solidly behind him, will fight tooth and nail to keep the engineers from Philly at bay as long as he can.

While execs were understandably anxious to stay off the record, the reaction within the ranks of ABC, Miramax and Pixar was one of exuberant expectation. Burke is both well known and well respected in the Disney organization.

There was speculation the Comcast team would court Steve Jobs of Pixar as well as Roy Disney with the idea that their support would influence stockholders. Key strategists behind the Comcast move are apparently invesment bankers Felix Rohatyn and Steven Rattner.

“Dear Michael,” Roberts wrote in a letter dated Feb. 11 and distributed at a Comcast press conference at Gotham’s St. Regis hotel Wednesday, “I am writing following our conversation earlier this week in which I proposed that we enter into discussions to merge Disney and Comcast to create a premier entertainment and communications company. It is unfortunate that you are not willing to do so. Given this, the only way for us to proceed is to make a public proposal directly to you and your board.”

That’s what Wall Street calls a bearhug.

The seemingly soft-spoken, congenial Roberts used it with AT&T in the summer of 2002 after the telco rejected his invitation to sell its AT&T Broadband cable biz to Comcast. Roberts acquired the AT&T systems last year and showed chairman Michael Armstrong the door.

Since then, rumors about a potential Disney deal have surfaced sporadically.

Eyes on U

Comcast had a fleeting interest in bidding for Universal when Vivendi put it on the auction block. But the party line at Comcast was that it already had lots on its plate digesting the huge AT&T deal.

Roberts said at the press conference the AT&T integration had gone faster and better than anticipated and that Comcast is financially and strategically ready for its next big move.

Eisner, the Comcast gang may feel, is ripe for the picking, weakened by the constant agitating of former board members Roy Disney and Stanley Gold and by the recent defection of animation partner Pixar.

The merger proposal, a tax-free, all-stock transaction, calls for Comcast to assume $11.9 billion in Disney’s debt. Comcast would issue 0.78 of a Comcast share for each Disney share. Disney shareholders would own 42% of the combined company.

The exchange ratio worked out to about $26.47 per Disney share — a $5 billion, or 10%, premium over Disney’s $24.08 closing share price Tuesday. The Disney per share price will vary, depending on Comcast’s share price.

Some analysts have a price target of $30-$35 on Disney stock. In any case, Mouse shares jumped sharply Wednesday, closing up 14.62% at $27.60, erasing any premium at all, which Comcast shares dropped.

Disney can safely reject this first deal as being a lowball pitch.

Public-interest groups kicked up a fuss at the prospect of yet another media mega-merger. And FCC chairman Michael Powell promised to run the proposal through the “finest of filters.”

Roberts noted the two companies have no overlapping businesses. Currently there’s no rule against one company owning a TV broadcast biz and a cable company.

Comcast said current FCC regs would require it to make all national and regional cable nets available on a non-exclusive, non-discriminatory basis and not allow it to discriminate against unaffiliated programming services. Those rules were honed to become conditions of News Corp.’s recent purchase of satcaster DirecTV.

Maneuvering room

Comcast execs declined to say Wednesday if they would up the offer, but it’s likely they didn’t come out of the gate with their top bid.

“The ball is in the hands of the Disney board,” Roberts said. He declined to entertain questions as to what course Comcast would pursue if Disney and its board remained intransigent.

“We’re not going to go to any of those comments today,” he said. He insisted he wants to make the deal “as friendly and as fast as possible.”

If Disney resists, Comcast could launch a tender offer for Disney shares — something Disney could thwart by adopting a so-called poison pill provision. Or Comcast could try to reconfigure the board. A spate of lawsuits might well ensue, some Wall Streeters predicted, and things could get ugly.

After all, Eisner’s job had already been handed out even before Disney responded to Comcast’s press release, which hit the wires about 7 a.m. EST.

“I think they (Disney’s board) have signaled that they are looking at succession issues. Steve Burke is one of the most sought-after media execs around,” Roberts said.

In fact, the Comcast folks seemed to ooze confidence.

The merger, Roberts said, would create the world’s “premier entertainment and leisure company” and “restore the Disney brand to prominence and growth.”

Burke talked of “reigniting” the creative energy at a foundering Disney, particularly its animation division, which has failed to rekindle its success of the early 1990s. “We want to empower the animation group and reach out to Pixar and others to keep Disney as the premier animation (destination).”

In addition to luring Steve Jobs and Pixar back to the negotiating table, a Comcast buy could signal a more stable future for Disney subsid Miramax. Brothers Bob and Harvey Weinstein, whose troubled relationship with Eisner has been well documented, must renew their contracts with Disney by 2007. While Miramax refused to comment on the deal, Harvey Weinstein is known to have had a long and upbeat relationship with Brian Roberts. A Comcast buy also could speed up plans for a Miramax-branded cable channel to showcase the company’s 550-film library once it can free up the rights.

Crunching the numbers, Roberts believes that up to $1.2 billion in new value could be created in the first three years of marriage.

Of that total, Burke projected the combined entity could find $300 million-$500 million in cash-flow benefits from improving the “weak No. 4″ ABC network; $300 million-$400 million in overhead cost reductions; and another $200 million-$300 million in improving the performance of the Disney cable networks.

Burke said such gains don’t even include new business opportunities for the entity, including new cable nets and expanded video-on-demand and broadband services across the Comcast footprint.

Burke said the combined entity would look to leverage cross-promotional opportunities, such as extending the ESPN sports brand to Comcast channels Golf Network, Outdoor Life and regional sports nets.

Roberts is banking on Comcast’s management track record with previous mergers, like that with AT&T, and its proven ability to create value with cable nets such as QVC (sold recently to Liberty for a big gain).

New terrain

But Disney presents something far more challenging than combining two companies’ U.S. cable infrastructures. Despite Robert’s cool-handed recitation of the company’s discipline, commitment to Disney’s values and shrewd financial management, swallowing the global enormity of a company with film, TV, merchandising and theme parks is a daunting task.

Comcast shares dipped 7.96% to $31.23 on Wednesday — an expected decline for any company undertaking such a large acquisition. The concern for Comcast shareholders is just how high the pricetag could ultimately go if an aggressive bidding war ensues.

Comcast reported Wednesday that the company swung to a fourth-quarter profit of $383 million from a loss of $51 million a year earlier on revenues up 58% to $4.74 billion.

The quarterly profit is a turnaround. For the full year, Comcast reported total net profit of $3.24 billion on revenues of $18.35 billion.

More important, company touted the reduction of its debt load by $7 billion, giving it a sufficiently healthy balance sheet to undertake a Disney merger.

The company finished the year with 21.5 million subs, having added 1 million new digital subscribers last year to reach 7.7 million digital homes. It also said it now has 5.3 million broadband customers and nearly 1.3 million telephone customers.

Looking to 2004, Roberts promised revenue growth of around 10%.

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