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July 10, 2001 [WSJ.com]

Comcast Launches Battle For AT&T Shareholder Confidence


    (This story was originally published late Monday.)

NEW YORK -- Comcast Corp. (CMCSK, CMCSA) has between now and the spin off of AT&T Corp.'s (T) broadband division into a tracking stock to convince AT&T shareholders that its proposed merger of the unit represents a better deal for them.

Comcast launched its appeal last night, releasing to the public a letter to AT&T Chairman C. Michael Armstrong in which it proposed to buy AT&T Broadband for $58 billion. AT&T has said they are evaluating the proposal, but currently have no plans to act on it.

With AT&T unreceptive to the idea and the burden of the parent company's telecom business undoing the feasibility of a hostile takeover, Comcast's remaining path to a tax-free deal may be to persuade shareholders that the merger is a better option than the IPO.

While Wall Street has heralded Comcast's offer as attractive, it represents a large discount to the $100 billion-plus that AT&T paid for its assembly of cable assets, gained from major acquisitions of MediaOne and Tele-Communications Inc. Accepting the offer would represent a concession that AT&T overpaid for those assets.

"I'm afraid that corporate egos may mean that AT&T may decline (Comcast's merger proposal) unless it's a lot higher than it presently is," said Drake Johnstone, an analyst with Davenport & Co.

After AT&T Broadband goes public, a merger may be less attractive to Comcast because of taxes. However, if Comcast were to pursue a hostile takeover before the spin, it would have to bid for the whole company, whose debt and slow-growth telecom businesses might be hard to sell.

Comcast left the door open for a sweetened bid, saying it might offer additional equity and debt assumption for AT&T's minority stakes in Cablevision Systems Corp. (CVC), Rainbow Media, and Time Warner Entertainment, which is 75% owned by America Online Inc. (AOL). Comcast said it would eventually seek to sell those assets.

However, Johnstone thinks Comcast is unlikely to make the kind of offer AT&T might accept, which he estimates at $75 billion to $85 billion.

              Proposal Posted On Web Site

If a majority of AT&T shareholders vote against the broadband tracking stock, AT&T may be forced to accept a merger. Publicly touting its track record on improving the profitability of acquired systems as evidence it will be able to turn around AT&T, Comcast has taken its bid out of the drawing room and directly to shareholders in the hopes that a definitive price will be more attractive than the uncertainty of an initial public offering.

Some industry observers say Comcast's efforts will go unrewarded.

"Although it is plausible Comcast can influence the vote, such a vote could be months away," wrote analyst Floyd Greenwood of Prudential Securities. "We believe Comcast will be fighting an uphill battle as time is mainly on AT&T board's side."

AT&T hasn't set a date for the vote on the tracking stock, and can wait out any change in shareholder sentiment, Greenwood said.

Pressure from institutional shareholders may not be sufficient to force AT&T's hand. The company has 5 million shareholders, and, according to Salomon Smith Barney, retail investors own more than 50% of AT&T shares.

Comcast appears to be making every effort to publicize the proposal, which was posted at the top of the company's Web site Monday.

But the broad ownership of AT&T shares makes it particularly difficult for an outside company to convince shareholders to vote against a company proposal, according to Nicholas Economides, a professor at New York University's Stern School of Business. Comcast would have to offer a premium of 30% to 40% to convince enough retail investors to take an interest in rejecting the tracking stock proposal, he said.

AT&T declined to comment on what sort of offer the company would accept for the broadband unit.

Comcast officials could not be reached for comment.

-Christine Nuzum; Dow Jones Newswires; 201-938-5172; christine.nuzum@dowjones.com

Briefing Book for: AWE | CMCSA | CMCSK | T

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