Comcast Finds Itself Increasingly Hamstrung

Now that Disney(DIS Quote) has deemed Comcast's(CMCSA Quote) $49 billion takeover offer too stingy, and Comcast is suddenly finding Disney too expensive, the prospects for consummation of what seemed to some like a marriage made in heaven are looking grim.

Disney's board quickly rejected Comcast's week-old bid for the company on Monday night, saying the deal, which valued one share of Disney at 0.78 a share of Comcast, did "not fully value Disney's intrinsic value." In reaction, sources close to Comcast said the company would back away from its bid because Disney's market value had risen too much since the deal was publicized.

"We are not interested in Disney at current levels. If you look at our offer, it represents a 10% premium for Disney," said a source close to Comcast. "It's a strong proposal. It's compelling for both sets of shareholders if you look at Disney's performance over the last three years."

Last week's market action eroded that premium, leaving both companies dissatisfied with the offer. When first announced a week ago, Comcast's offer valued Disney's stock at $26.47, a 10% premium based on where Disney closed the day before. But since then, Comcast's stock has dropped while Disney's has gained -- meaning Comcast's offer valued a Disney share at $23.32, more than 13% below Disney's close on Friday.

By Friday's close, Comcast's shares were off 12% since the deal was announced and, despite a bounce Tuesday, stand every chance of weakening again if management raises its bid. If this continues to happen while shares of Disney rise, the company's bid will be mired in quicksand, offering more of itself for Disney but never really gaining in value. In order to prevent this, analysts say, Comcast will have to shore up its bid by adding collars to lock in the price range it's willing to pay.

From Premium to Deficit A day before the Comcast deal was announced, Comcast's offer placed a 10% premium on Disney shares. But with Comcast's stock falling and Disney's rising on anticipation of a higher bid, the offer seems to undervalue Disney by more than 13%, based on Friday's close
	Price		Deal Valuation of DIS Shares	Premium/Deficit
	DIS	CMCSA		Per Share	%
One day before	$24.08	$33.93	$26.47	$2.39	9.9%
Friday's close	26.92	29.90	23.32	-3.60	-13.4
Source: CSFB research

"I think that will be definitely something to watch. It's a concern for Comcast shareholders, and Comcast has walked away from deals in the past. I don't think they'll go much above $30 or $30.50 for Disney," said David Joyce, analyst at Guzman & Co. "The next round of bidding would include some form of collar arrangement. There's also some talk of incremental cash along with a higher bid, but there could be tax implications there."