AT&T is deciding whether to accept Comcast’s bid for its broadband division.
US cable operator Comcast last week announced a bid for AT&T’s poorly performing broadband division. Comcast offered to pay $41 billion in stock, as well as assuming $13.5 billion in debt. Since then, AT&T has been considering the offer. Its share price has risen by 20%.
AT&T Broadband has generated a profit margin of 18%, compared with Comcast’s 41% and the industry average of 40%, thanks to its risky strategy. It purchased TCI and MediaOne for $59.4 billion and $44 billion respectively, as well as investing heavily in upgrading its cable infrastructure.
Comcast has estimated the cost savings created by increased efficiency at $1.25 billion. On top of this, the new company will be twice as large as nearest competitor AOL Time Warner, benefiting from increased bargaining power over program makers and advertisers. It will also offer advertisers a national presence, with networks in 14 of the 20 biggest US cities. These advantages are expected to generate $2.7 billion.
The FCC’s cable ownership rules, adopted in 1993, aim to prevent operators reaching more than 30% of the market. AT&T’s 26% share combined with Comcast’s 10% would cross this threshold. However, once AT&T has sold its stakes in rival operators, the combined entity’s market share will fall to 25%.
AT&T wants Comcast to raise its offer by at least $16 billion, since it believes that the true value of the division is over $70 billion. It is also worried that Comcast CEO Brian Roberts would have effective control over the new company despite owning little more than 1%.
Allowing the sale is a low-risk option for AT&T, avoiding the uncertainties of a breakup. However, especially given AT&T’s announcement on Monday that it has received a number of approaches from other companies, the Comcast bid is unlikely to succeed in its present form. If Comcast is prepared to raise the price and address concerns over the structure, AT&T may well agree to the deal. At least, it’s ready to enter further negotiations.
