COMCAST BIDS $66 BILLION FOR DISNEY, ‘HUGE’ POLITICAL REACTION SEEN

Comcast offered a stock deal for Disney that it valued at $66 billion, a $5 billion (8.2%) premium over the pre- announcement value of Disney stock. Disney shareholders would end up with 42% of the merged company, and Comcast CEO Brian Roberts said some Disney board members would be welcome on a post -merger Comcast board. The unsolicited offer follows Disney Chmn. Michael Eisner’s rejection of a merger earlier in the week, Roberts said.

The resulting company would be the first to include both broadcast assets, including ABC Networks and TV stations reaching 25% of U.S. households, and cable systems, as well as a wide array of cable networks, movie studios, theme parks and other assets. Since its merger with AT&T Broadband less than 2 years ago, Comcast has been the largest cable system owner in the U.S., generating $4.7 billion revenue and $383 million profit in the 4th quarter ended Dec. 31.

Combining broadcast and cable assets theoretically isn’t a problem, since the U.S. Appeals Court, D.C., vacated the broadcast-cable cross-ownership ban 2 years ago and the FCC hasn’t moved to reinstate it. In a press/analyst briefing Wed., Roberts said there were “very clear laws” on such mergers and “we believe this can happen… with proper review.”

Policy analysts at Legg Mason agreed there was “no current regulatory or antitrust bar” to a Comcast-Disney merger. It said recent antitrust approval of the News Corp. takeover of DirecTV “suggests that Comcast-Disney would pass antitrust muster,” although some conditions might be imposed. Roberts acknowledged that Comcast probably would have to agree to program access conditions and said he was willing to do that. In his letter to Disney shareholders, Roberts said he was “confident that all necessary approvals can be obtained in a timely fashion.”

But a Comcast-Disney deal appears likely to generate more consumer interest than even the News Corp. takeover of DirecTV, observers suggested. The Consumers Union (CU), for example, rushed out a news release saying the deal would mean less consumer choice, higher costs and more media concentration. Suggesting there might be public interest issues in the deal approval process, CU Senior Public Policy Dir. Gene Kimmelman said: “If this deal goes through, it tightens the ownership grip over the most important sources of news, information and entertainment in our country… The potential impact is enormous.” He said the announcement this week that DirecTV would raise rates showed that News Corp. wasn’t going to use DBS to compete actively against cable, and “the proposed Comcast deal will just further the enormous consolidation we've seen… that has led to less competition and higher costs for consumers.”

There will be “some negative political reaction” to a merger, Legg Mason said. It said, for example, the FCC could block it on public interest grounds, although “that would be difficult unless there is a political consensus.” On Capitol Hill, there is “likely [to] be a huge political reaction,” Legg Mason said, since Comcast is “more dominant in its multichannel markets than DirecTV was in the national multichannel market.” The merger would give legislators an opportunity to dredge up every significant political issue, including cable rates, DTV must-carry and broadcast indecency, the analysis said: “We would not be surprised to see bills introduced in Congress that seek to block or condition such a deal.” The fact that the deal comes during a Presidential election year “adds to the volatile nature of the deal,” Legg Mason said.

In its initial announcement, Comcast moved to head off one major concern, saying it would comply with program access rules, which guarantee that programming will be made available on a nondiscriminatory basis to competing media. Comcast said such a guarantee “should address potential concerns that could be raised in the regulatory process.”

In response to a question, Roberts also indirectly addressed cable rates, indicating that Comcast wasn’t likely to continue raising fees for ESPN. Comcast has been locked in a dispute with Disney over carriage fees for ESPN, blaming the network for a significant portion of the recent increases in cable rates.

In touting the deal, Comcast officials said they could make most Disney assets, including ESPN, more profitable. Roberts said that could be done without raising carriage fees by using ESPN to introduce new products, such as HDTV channels, streaming video products and related cable channels. ESPN also can make existing Comcast properties, such as Golf Channel, more profitable through cross-promotion and even renaming, Roberts said.

The Comcast-Disney deal is far from done as far as shareholders are concerned. For example, Michael Gibbons of Brown Gibbons Lang & Co. said the price premium that Comcast was offering wouldn’t be enough. Roberts also acknowledged that Comcast hadn’t even approached any Disney shareholders for support, including those led by Roy Disney, who opposed Eisner’s leadership.

Roberts downplayed the possibility of offering a higher price, in response to questions, and even warned that “we've walked away [from other deals] before… This is our offer and we think it’s very compelling.” He said Comcast always had been “a disciplined buyer” that didn’t overpay: “We have got to do the right thing for the shareholders.”

Instead of price, Comcast was touting the higher profits that Disney shareholders could expect as a result of the deal. Without specifically mentioning Eisner, Comcast Cable Pres. Steve Burke, a veteran of 12 years at Disney, said profit performance could be improved significantly in virtually every Disney operating division. Just boosting ABC from 4th place among TV networks “halfway to 3rd place” would boost profitability there by $300-$400 million, Burke said. He said there was a “synergy potential” of $200-$300 million annually for the Disney cable networks, and potential overhead savings of $300-$400 million. Overall, he said, the merger would boost Disney profitability by $800 million to $1.2 billion annually.

Roberts repeatedly touted the “legendary” Disney brand and assured shareholders Comcast would respect and revitalize it. Burke said the deal was a “chance to re-ignite the world’s greatest entertainment business.” He said Disney content, for example, could be combined with Comcast infrastructure to ease the rollout of new cable channels.

Roberts also downplayed failures of some previous media mergers, such as AOL-Time Warner. He said there were plenty of examples of both bad and good mergers, and Comcast’s recent takeover of AT&T Broadband clearly was a good one: “It comes down to people, execution and not getting ahead of ourselves. We have a great track record.” However, Kaufman Bros. immediately downgraded Comcast stock to hold, from buy, saying “the market seems to believe Comcast, or another buyer, will have to pay a far higher premium for Disney… Fundamentally, we view the proposed combination as both risky and unattractive for Comcast.”

Just before the merger offer announcement, Comcast said it had big profit increases in the 4th quarter and full year ended Dec. 31. Eighteen months after completion of the AT&T deal, net income for the quarter grew to $383 million, from a $51 million loss. Operating profit was $742 million, vs. $81 million, cash flow nearly doubled to $1.7 billion and pro forma revenue climbed to $4.7 billion from $3 billion. The company has eliminated $7 billion of debt in the last year and “financially, we are better positioned today than I would have thought possible at the beginning of this year,” Roberts said. The company added 140,000 basic cable subscribers in 2003, vs. a pro forma loss of 415,000 the previous year, when the AT&T cable systems were largely independent.

Comcast’s bid “may lead to yet another troubling change in our media landscape,” said Sens. DeWine (R-O.) and Kohl (D-Wis.), chmn. and ranking member of the Senate Antitrust Subcommittee, in a joint statement. They said vertical consolidation “may well pose a risk to competition in the marketplace of ideas and the diversity of news, information and entertainment available to the American public.” They said the subcommittee would “examine” the proposed merger “very carefully.”

In a Senate subcommittee hearing on cable pricing, Sens. Hatch (R-Utah) and DeWine said a Comcast takeover of Disney would get heavy scrutiny on the Hill. Insight Communications CEO Michael Willner, whose company is half-owned by Comcast, said he was as surprised as anyone else by Comcast’s plans: “It’s all very fresh, and we're just trying to figure it out.” Willner said the FCC should have few concerns about the deal in light of the News Corp. takeover of DirecTV.

Senate Commerce Committee Chmn. McCain (R-Ariz.) said he was concerned about the proposed merger. “Further consolidation in the industry is troubling,” he said. In a hearing Wed., FCC Comr. Copps said regulatory officials needed to think about how the proposed merger would affect distribution and content.

Analyst Scott Cleland of Precursor said he believed the deal “makes a ton of sense” now that Rupert Murdoch’s company has DirecTV. “Distribution and content go together like peanut butter and jelly,” he said. Cleland said the deal was “highly likely to be approved.” He also said Disney might need the deal as much as Comcast needed it to compete with News Corp. “Disney is more valuable with cable distribution than without it. Right now, they're an over-the-air broadcast business that’s near death. Disney would be going from having the worst distribution to the best and most secure,” Cleland said, and he expects Comcast eventually will be successful in its bid.

Consumer Federation of America Research Dir. Mark Cooper told us that FCC Chmn. Powell had invited the Comcast takeover bid by allowing News Corp. to acquire DirecTV. Doing so forced Comcast to seek programming for its distribution channel, he said. “If you write a set of rules, naturally, the companies are going to go to the maximum,” he said. He said the FCC “made this merger possible” by declining to resurrect the cable-broadcast cross-ownership rules after the courts struck them down: “That doesn’t mean the FCC couldn’t write new ones, but they didn’t open a record after it was vacated.” Cooper said Comcast was a regular abuser of the terrestrial loophole with its regional sports programming, and probably would be inclined to deny ESPN programming to rivals unless the govt. stepped in.

NCTA declined to comment, citing its policy of not talking about marketplace transactions. The Center for Creative Voices in Media (CCV) said regulators should reject the deal as harmful to the public interest. “Comcast’s proposed merger with Disney would deal a devastating blow to the few diverse viewpoints, voices and sources of programming still remaining on broadcast and cable television,” said CCV Exec. Dir. Jonathan Rintels. Jeff Chester, exec. dir., Center for Digital Democracy, also said the FCC should reject the deal: “It’s clear that Brian Roberts knows no limits to his media ownership ambitions, having already swallowed AT&T Broadband (which in turn had gobbled up both TCI and MediaOne). More importantly, Roberts and Comcast fail to appreciate that such heightened media consolidation in cable, broadcast and online distribution and content is a threat to American democracy.” -- Michael Feazel, Brigitte Greenberg

Comcast-Disney Merger Notebook…

A Disney-Comcast merger wouldn’t change the competitive landscape much for News Corp., CEO Rupert Murdoch said in a separate conference call. However, he said, it would “cause a hell of a row in Washington, though I would [predict] they would get it [approved], probably with some of the conditions we had to agree to” to complete News Corp.’s takeover of Hughes Electronics and subsidiaries DirecTV and PanAmSat. Murdoch admitted a merger would create an entity that was more developed than News Corp.’s current configuration, but he didn’t express concern that negotiating power would diminish if the merger were approved: “We would have just as much ability to pressure them as [they would have to pressure] us… There would be a lot of back and forth, but we would be at a pretty equal position… There’s nothing there we can’t do or grow into.” Murdoch said the company would have to watch local sports closely, saying Comcast might look at linking its local sports programming with ESPN’s national sports coverage. News Corp. won’t make a counter offer for Disney, Murdoch confirmed.

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Helped by lower programming costs and higher ad rates, Disney’s media networks, including ABC and ESPN, reported a 6% revenue increase to $3.1 billion in the first quarter ended Dec. 31. Operating income jumped to $344 million from a $71 million loss a year ago. Cable’s share of the rise in operating income was $301 million, while broadcast contributed $110 million. Disney said the cable increase resulted mainly from higher affiliate and ad revenue. The broadcast increase was mainly due to lower programming expenses driven by NFL costs -- including fewer NFL broadcasts in the quarter -- and less expensive prime-time series. It also benefited from higher upfront ad sales rates, the company said. Disney’s overall revenue increased 19% to $8.55 billion and net income to $688 million from $36 million a year ago.