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Comcast’s Disney Deal May Be Bold, But Still Savvy

February 2004

Comcast's Disney Deal May Be Bold, But Still Savvy

Thursday, February 12, 2004 09:28 PM ET

NEW YORK (Dow Jones)-- Comcast Corp. (CMCSA, CMCSK), known for its savvy deal- making, is betting the biggest hand of its corporate life.

Following a string of successful acquisitions of smaller cable operators, Comcast says it's ready to take on Disney. But skeptics point out that not only is this deal bigger, it also involves a totally different industry.

Yet despite these glaring differences, supporters note that Chief Executive Brian Roberts has gone about the deal in characteristic, savvy fashion. And shareholders, assured by the company's history of sure-footed deals, are not worried that Disney will get out of hand.

"I don't think they'll put shareholders in an upside down position" that would permanently destroy value, said Matt Souer, a portfolio manager for the Oak Value Fund which holds Comcast shares.

It's Comcast's biggest deal, but "there are not many (companies) on the planet with a history of integrating a firm the size of Disney," said Ken Marlin, managing partner of Marlin & Associates, a boutique investment banking advisory firm specializing in mergers and acquisitions. Roberts has got a pretty good track record in terms of integrating companies, he added.

Comcast's bid is not the company's first dip into the media industry. The company has several cable networks, including E! Entertainment and the Golf Channel, and expressed some interest in Vivendi Universal last year.

After months of rumors, Comcast said in August that it would not bid for Vivendi's U.S. entertainment assets, but would explore a cable alliance with the company. Experts surmised that Comcast had wisely decided Vivendi's price tag was too high, especially with several interested acquirers at the time.

Comcast's opportunistic timing with Disney has not gone unnoticed - another trait that some say characterizes Roberts' savvy deal-making. The unsolicited bid comes at a time when Disney Chief Executive Michael Eisner is coming under heavy pressure over his performance.

The problems at Disney means that psychologically, shareholders and board members "may well be open to a deal," Marlin said.

"They have a history of attacking when others are vulnerable. They're doing the same thing here," said a Comcast shareholder who declined to be identified.

Comcast's bid for AT&T Broadband, which many saw as bold, took advantage of AT&T's low stock price and Wall Street's low opinion of the cable business at the time.

Douglas Branson, a professor at the University of Pittsburgh School of Law, noted that Comcast's attempt to present the deal as a friendly merger of equals can help keep its price tag low.

Comcast's acquisition of AT&T Broadband ended up as a friendly deal that named AT&T Broadband Chief Executive Michael Armstrong as chairman of the combined company.

But if Eisner's board sides with him against the merger, the deal could become much more expensive for Comcast.

Also, Disney's rising and Comcast's declining stock price means that Comcast will almost certainly have to raise its offer.

After an 8% drop Wednesday, Comcast shares traded down 3.7% Thursday to close at $30.06. Disney shares finished up 1.4% at $28 Thursday, after jumping 14.6% Wednesday.

Comcast's proposed bid would issue 0.78 of a Comcast class A share for each Disney share. The drop in Comcast's stock price lowers the value of the swap to $23.45 for each Disney share, below Disney's current stock price.

Marlin said he expected up to a 30% premium to Disney's stock price, which would be average for merger deals.

If Comcast had to include a significant cash component, on the order of $20 billion or $30 billion, it would need to sell some off some assets, Marlin said. Some properties mentioned were Disney's ESPN or theme parks, but many were quick to point out that such a sale could be seen as unfavorable.

Comcast ended the year with nearly $1.6 billion in cash and non-strategic assets plus $1.5 billion in Time Warner Inc. stock, $1.5 billion in Liberty Media Corp. stock, and a 21% interest in Time Warner Cable.

Trading in Disney's shares indicates that shareholders hope Comcast will raise its bid significantly. But Comcast's shareholders are confident that the company won't pay much more.

"I think it's a fair price," Souer said. Another Comcast shareholder noted that the cable company has better profit margins and Disney has higher revenue.

"I don't know the maximum (Comcast) would willing to entertain, but I do know they are disciplined and walked away from deals," said the shareholder.

-By Ellen Sheng, Dow Jones Newswires

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