AT&T Corp. is trying to wrest MediaOne Group Inc. awayfrom Comcast Corp., submitting an unsolicited bid that AT&T figures is 17 percenthigher than what Comcast agreed to pay a month ago.
AT&T said last Thursday that its offer was $62 billion,made up of a mix of cash, stock and assumed debt.
There were other sweeteners, too. Unlike Comcast'sproposal, the AT&T bid includes stock with voting privileges. AT&T also said itwould raise the cash component by up to $3.5 billion if AT&T's stock price falls.The Comcast bid had no such provision.
The nonvoting nature of the stock and the absence ofdownside protection had put off a key MediaOne shareholder -- Amos Hostetter, the formerContinental Cablevision Inc. chairman, who sold that MSO to what was then called U S WestMedia Group in 1996.
Hostetter revealed last week that he opposed the Comcastoffer and he backs the AT&T bid. He would become the AT&T cable unit'snonexecutive chairman if its offer prevails.
Comcast had no public response at press time.
The drama -- the first such situation in memory for thecable industry -- could play out until May 26: MediaOne has until May 6 to accept orreject AT&T's offer, and Comcast would have five days to match it. MediaOne couldthen wait until May 26 to decide which offer to accept, officials said last week.
AT&T made its surprise offer April 22, one month afterComcast announced its agreement to buy MediaOne for what was calculated then at about $60billion.
As part of that agreement, MediaOne had 45 days in which toaccept a competing offer. While AT&T and other MSOs were known to be interested inMediaOne, most analysts thought it unlikely that a rival bid would emerge.
"This was a bold move," said Scott Cleland,managing director of Legg Mason Wood Walker's Precursor Group, "but it fits withtheir wanting to have a larger cable footprint."
AT&T said the main driver behind the deal wasincreasing its presence in the broadband market. With MediaOne, the long-distance carriercould be a major force in local telephony and high-speed Internet service virtuallyovernight.
The deal would create a cable powerhouse with 16 millionsubscribers -- 18.5 million counting MediaOne's 25 percent stake in Time WarnerEntertainment -- as well as a significant presence in the high-speed Internet market and agrowing presence in digital telephony.
MediaOne is a partner in the Road Runner high-speedInternet service, which has about 250,000 subscribers. Coupling that with AT&T'sinterest in @Home Network, which has 460,000 subscribers in North America, AT&T couldbecome even more of a dominant force in the market.
And although the company may have been able to get the samesynergies by forming a joint venture with MediaOne, rather than buying it outright, thatapparently wasn't a consideration here.
AT&T has struck deals to form several joint telephonyventures, including an agreement with Time Warner Inc., but chairman C. Michael Armstrongsaid they are not working out as expected.
"Joint ventures are running into difficulty indefining the scope," Armstrong said. "We're having problems separating thevoice and data applications. Technology and time are converging them. It's verydifficult to structure a joint venture around any single one of these. We did not try tonegotiate a joint venture with MediaOne."
Armstrong did say that the negotiations with Time Warnerare going smoothly, and that the deal is expected to close soon. The MediaOne deal couldeven strengthen that relationship, he added.
SG Cowen Securities Corp. cable analyst Gary Farber wasasked last Friday whether he thought that Comcast would try to top AT&T.
"That's the big question," he said."It's hard to know what they would come back with. If I had to guess, I wouldsay that they come back with something. It's more logical that they would come backwith a couple of partners."
Farber noted that Comcast's stock rose modestly Friday-- an indication that investors were uncertain about Comcast's next move.
"The one thing that you can say is once you let go ofthese properties, you can't get them back," he added.
Janco Partners analyst Ted Henderson said in a report lastFriday that he didn't expect Comcast to get into a bidding war with AT&T."Now, this is like the AT&T of old -- the one with the 'Reach out and crushsomeone' attitude," he wrote.
MediaOne confirmed receipt of AT&T's proposal, butit declined further comment.
"We have received the proposal from AT&T, and itis currently under review," MediaOne spokesman Steve Lang said.
If MediaOne accepts the offer, AT&T would add about 5million subscribers clustered in some of the largest markets in the country. MediaOne alsohas a significant digital-telephony operation, with about 24,000 subscribers, that shouldfit in well with AT&T's telephony goals.
The combined AT&T/MediaOne would have 72 percent of itssubscribers in the top 15 markets in the nation.
In addition, those top 15 markets would average about300,000 subscribers apiece, with the top 10 averaging 500,000.
AT&T would also get MediaOne's 25 percent stake inTWE, the cable and programming partnership with Time Warner. TWE has about 10 millioncable subscribers.
One source familiar with discussions between Time Warnerand AT&T said Time Warner would not attempt to block AT&T's bid for MediaOne.
The source said the TWE partnership might get dissolved,with Time Warner taking full control of the content assets, including Home Box Office.Time Warner and MediaOne had talked about restructuring the partnership, but they couldnot agree on terms.
The proposal works out to about $87.38 per MediaOne share,with $30.85 in cash and 0.95 shares of AT&T stock for each share of MediaOne. AT&Talso would assume $4.5 billion in MediaOne debt.
MediaOne has about 660 million shares outstanding, makingthe deal worth $58 billion, not including assumption of debt. If MediaOne accepts thedeal, it would also have to pay Comcast a $1.5 billion breakup fee.
AT&T is partly financing the deal through a $30 billioncredit facility arranged by Goldman Sachs & Co.'s Goldman Sachs Credit PartnersL.P. and Chase Manhattan Corp. Goldman and Chase have each committed $5 billion
The AT&T shares would also pay dividends, unlike theComcast stock that was offered.
There would be some dilution to AT&T shareholders --something that Armstrong and AT&T Broadband & Internet Services president Leo J.Hindery Jr. had said might deter them from making other deals as big as AT&T's$55 billion buyout of Tele-Communications Inc.
Armstrong said the profit impact would be about 30 centsper share for existing shareholders -- an amount that he characterized as insignificant.
Comcast had proposed to swap 1.1 shares of its class Aspecial common stock for each MediaOne share. At the time, the deal was valued at $72.88per share.
AT&T's offer also includes a collar of $85 pershare, protecting MediaOne stockholders in the event of a decline in the price of AT&Tstock. That could add $3.5 billion in cash to the purchase price.
Comcast's offer had no collar protecting MediaOneshareholders from a decline in Comcast's stock.
Although many analysts touted the Comcast deal as a goodone for both companies, MediaOne's largest shareholder -- Hostetter, with 9.3 percentof the company's outstanding stock -- apparently objected to the lack of votingpower.
In a document filed with the U.S. Securities and ExchangeCommission April 22, Hostetter stated that he approached AT&T April 1 about making acounteroffer for MediaOne.
According to the filing, Hostetter wrote to MediaOnemanagement March 25, expressing his displeasure that the Roberts family -- the majorityshareholders in Comcast -- would have 80 percent voting control of the combined companywhile holding less than 1 percent economic interest
Hostetter also objected to the lack of collar protectionfor MediaOne shareholders.
If AT&T buys MediaOne, Hostetter would becomenonexecutive chairman of AT&T Broadband, and he would get a seat on AT&T'sboard of directors.
Hostetter's role in the deal would mark the return ofone of the most respected members of the cable community, after a long absence.
Hostetter sold his Continental systems to U S West MediaGroup for about $10 billion. Shortly after the deal went through, friction developedbetween Hostetter and U S West management, as the latter reneged on an agreement to keepthe cable headquarters in Boston, Continental's base of operations.
Hostetter resigned from the company, which became MediaOneGroup Inc. in 1997.
Armstrong said in a conference call with analysts thatHostetter's role would be substantial.
"The thing that we have to deliver on is the executionof the company," Armstrong added. "Bringing Amos on board should be viewed asvery much helping it to realize that execution. He will be involved in strategy goingforward and staffing going forward."
Hostetter's old friend, Hindery, was also happy to seehim come on board.
"This probably is the best day of my career in a longtime," Hindery said during the analyst call. "Working with Amos is like cominghome."
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