AT&T (Sort of) Sells Broadband Unit to Comcast

12/20/01 - 07:32 AM EST

Last summer, when Comcast(CMCSK - Cramer's Take - Stockpickr) made its out-of-the-blue offer for AT&T Broadband -- an offer worth somewhere between $40 billion and $55 billion, depending on whose numbers you use and how you count the beans -- I said that a Comcast buyout was "the outcome that seems best for all concerned," particularly for AT&T Broadband's beleaguered cable customers.

Looks like that's what we'll see, as details emerged Wednesday night on AT&T's (T - Cramer's Take - Stockpickr) "sale" of AT&T Broadband to Comcast -- once again, a deal hard to value, with early numbers running from $52 billion to $72 billion. In many ways, this feels more like Comcast sold itself to AT&T, or rather paid AT&T for the privilege of joining Broadband in a new venture, but so be it.

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AT&T to Merge Cable Unit With Comcast

Who Gets What

Comcast has a generally good reputation for running reliable cable systems -- not perfect, mind you, but hey, this is The Cable Guy business. After what they've gone through first with TCI and Media One, and then with AT&T, after AT&T CEO Mike Armstrong spent $100 billion-plus to assemble the country's largest cable-TV system, customers of AT&T Broadband need some relief.

So do AT&T shareholders, of course, and if my first instincts hold, they got a lot more than they might reasonably have expected out of this deal. Especially given the reputation of Comcast's controlling Roberts family for pinching pennies and never overspending on acquisitions, it paid a high price.

The deal isn't simple, but in general, it looks to me like AT&T got about $70 billion for its broadband unit. And Mike Armstrong? He got a job, too, but more on that in a minute.

Comcast will pay with $47 billion of common stock, assume another $20 billion in AT&T debt and adopt a $5 billion convertible stake held by Microsoft (MSFT - Cramer's Take - Stockpickr). For that, it gets 44% of the equity -- but only a one-third voting share -- of the new company. (In its earlier offers, Comcast would have gotten only a minority equity stake, but voting control. This is quite a backdown for the Roberts family.)

The two operations will be joined in a new company, called, surprise ... AT&T Comcast. Comcast holders will get one share in the new company for each Comcast share they hold at the time the deal closes. AT&T shareholders on that date will get 0.34 of a share in the new company per AT&T share owned.

Comcast also takes on the $5 billion in AT&T converts that Microsoft bought two years ago. Observers expect Microsoft to quickly convert those convertible shares into equity in the new business. (Microsoft already had an equity stake in Comcast.)

AT&T holders net out about $13 in total value, based on Comcast's Wednesday close of $38.07. Plus -- big plus -- they still own all of AT&T's local and long-distance service operations. AT&T holders walk away with 66% voting control and a 56% equity stake in the new entity.

AT&T says the price paid by Comcast is around $4,500 per current cable subscriber, as opposed to the $4,100 or so AT&T paid for those subscribers originally. (AT&T conveniently ignores inflation and opportunity-cost calculations and interim capital investments in the business in these numbers.) But it does give AT&T and Armstrong a chance to walk out with their heads up because most observers thought Armstrong had lost AT&T's shirt on the cable deal.

AT&T Comcast will wind up with a total of 22 million cable subscribers, putting it far ahead in domestic cable connections. Second-place AOL Time Warner's(AOL - Cramer's Take - Stockpickr) Time Warner Cable has about 12.5 million hook-ups.

Expecting Deal's Approval

What about the regulators? I don't think they'll stand in the way of this deal, despite the size and commanding position of the new company. Expect some saber-rattling, but ultimately, approval. The U.S. Supreme Court's Dec. 3 decision not to consider re-establishing limits on the number of subscribers that a given cable company can sign up must surely encourage the conglomerateurs. With the Bush administration's support for the court's ruling, new limits from Washington on cable-system size are highly unlikely.

What about the word on the street that some AT&T people really wanted to hold onto Broadband? All true, I'm told; this was a rare case of fiscal good sense at Armstrong's AT&T, overcoming pride and a gambler's instinct that in a few years the cable piece would be worth a lot more.

The proceeds from the sale will knock down by at least half the $40 billion-plus in debt on AT&T's balance sheet. That should, in turn, make the planned sale of its remaining local and long-distance service units, together or separately, a lot easier.

Oh, and Armstrong's new job? He becomes chairman of the new company in about a year. Envisioning a Comcast executive suite shared by Armstrong and President Brian Roberts -- to say nothing of Brian's father, current Chairman Ralph Roberts -- defies the imagination. I suspect that over the next year we'll see at least Ralph, and probably Brian as well, begin to withdraw from the business.

Too much history there, as they say.