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Disney Says No to Comcast Bid

The ball is back in Comcast Corp.'s court, after The Walt Disney Co. returned serve, possibly a little ahead of the conventional wisdom.

Disney last week rejected as too low Comcast's all-stock buyout offer, after a run-up in Disney's share price wiped out any premium.

As of Feb. 13, the Comcast offer valued Disney shares at $23.32 each, about $3.60 below Disney's trading price of $26.92.

Disney, which had been rising since Comcast declared its intentions on Feb. 11, fell back to $26.71 on Feb. 18, rising again to $27 on Feb. 19.

Comcast — which initially fell — rose from $28.98 on Feb. 13 to $29.39 on Feb. 19.

As of last Thursday, the deal was worth about $64.2 billion (including $11.9 billion in Disney debt).

That's closer to the $66 billion valuation Comcast estimated when it announced the bid, but still short of what Disney would want.

"We are committed to creating shareholder value now and in the future, and will carefully consider any legitimate proposal that would accomplish that objective," the Disney board said in a statement on Feb. 16.

"In any proposal by Comcast, or any other company, the board will consider and assess the value to be received in exchange for the shares of Disney, and also the appropriate premium to reflect the full value of Disney. The board has confidence in the business, financial and creative direction of Disney under the leadership of Michael Eisner and his management team."

For the moment, it appears Comcast is sticking to its original offer and has no plans to sweeten it.

"Our proposal to acquire The Walt Disney Co. reflects a full and generous valuation based upon Disney's prospects and performance over a long period of time, representing a significant premium over Disney's unaffected share price during any relevant measurement period over the last three years," Comcast replied in a statement. "We maintain the belief that our merger proposal represents a sound and compelling proposition for both sets of shareholders."

Some analysts have said Disney could fetch $35 to $38 per share were it sold now.

But analysts also think it unlikely new bidders will enter the picture to help drive up the price — or see Comcast rushing to increase its bid.

According to several analysts, Comcast would likely wait until after Disney's March 3 annual meeting in Philadelphia before increasing its bid.

That meeting is expected to be a contentious one: former Disney board members Roy Disney and Stanley Gold have launched a campaign to solicit proxy votes to oust Eisner and other Disney management at the meeting.

If that campaign gets enough support, it could bolster Comcast's contention that fresh management is needed.

While most analysts expect Comcast to raise its offer, they are split as to whether that will include a cash component. Citigroup Smith Barney analyst Niraj Gupta wrote in a report that Comcast could easily absorb $6 billion to $8 billion in debt and still maintain its investment grade rating.

Other analysts think it more likely Comcast increases the stock component of its bid closer to 1 share of Comcast for 1 share of Disney (it's currently at 0.78 share of Comcast).

Gupta added that Comcast could just walk away – an option that Comcast CEO Brian Roberts said was a possibility all along.

"We do not believe the Disney transaction is a 'must have' for Comcast," Gupta wrote. "We see other long-term strategic alternatives for content aggregation, including returning with a bid for Disney (in the future) and pursuing a business combination with other studio owners."

Other analyst reports late last week appeared to give more weight to Comcast's possibly walking away if the price gets too high.

Other bidders could get involved, including Microsoft Corp. and Time Warner Inc.

While Time Warner was said to have hired investment bankers to help explore the possibility of a Disney bid, most analysts believe that taking on Disney would be too big a task.

Already two potential suitors have dropped out of the race — News Corp. chairman Rupert Murdoch and Viacom Inc. president and chief operating officer Mel Karmazin have said in published reports that they have no interest in pursuing Disney.

Microsoft has been more apt to invest in entertainment and distribution than to try to buy it.

Disney, according to several published reports, has hired New York attorney Martin Lipton (the inventor of the poison pill defense against hostile takeovers) as well as New York investment bankers Goldman Sachs & Co. and Bear, Stearns & Co. to fend off Comcast.

Comcast already has assembled its team of investment bankers — Morgan Stanley, JP Morgan, Quadrangle Group and Rohatyn Associates. Davis Polk & Wardwell is the legal advisor to Comcast.