Comcast Finds Itself Increasingly Hamstrung
Now that
Disney
(DIS) - Get Report
has deemed
Comcast's
(CMCSA) - Get Report
$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.
"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."
This Could Take a While
Until something happens, the deal appears to have stalled out. One wild card could be the emergence of a white knight, although that appears unlikely. Over the weekend,
Viacom
(VIA) - Get Report
President Mel Karmazin said the company was not interested in Disney.
"There may or may not be a white knight second or third bidder to emerge, but there is certainly no urgency on Disney's part to sell. This might play out a lot longer than investors think," said William Drewry, an analyst at CSFB.
Indeed, neither company may be in a rush to make a move right away.
Disney doesn't have to act until Comcast raises its bid, focusing instead on its March 3 shareholders meeting, the recent crisis of confidence involving Eisner and the loss of its deal with
Pixar
(PIXR)
. And Comcast doesn't have to raise its bid immediately, hoping its share price will rebound once the headlines die down. With shares trading at 11 times cash flow on the basis of Friday's close, some analysts say Comcast appears undervalued when compared with Disney.
Disney's No Means Yes to a Higher Bid
For what it's worth, Disney's management appears to be somewhat open to Comcast's hostile bid because its rejection of the deal pales in comparison with the hostile reaction other companies have had to unsolicited bids.
Recently,
PeopleSoft's
(PSFT)
board called upon the Department of Justice to strike down
Oracle's
(ORCL) - Get Report
attempt, while
Atlantic Coast Airlines
(ACAI)
filed a lawsuit against both
Mesa Airlines
(MESA) - Get Report
and
United Airlines
(UALAQ)
after Mesa's unsolicited merger attempt. Unlike those situations, the lack of strong language seems to imply that Disney's board isn't dead set against a merger with Comcast -- just not at the current price.
"Unlike what we saw with ACA, where they were unwilling to pursue any option, it appears Disney is at least trying to fulfill its fiduciary responsibility and entertain and examine all possible options," said Jon Ornstein, CEO of Mesa Airlines, whose unsolicited bid for Atlantic Coast failed a month ago.
One reason for this is that Disney's board of directors is under siege and wants to show shareholders it will consider anything that will increase value for them. A week ago, Walt Disney's nephew and former director Roy Disney sued the company over a proxy battle, while another group of shareholders sued, alleging that CEO Michael Eisner and the board "are attempting unfairly to deprive plaintiff and other members of the Class the true value of their investment in Disney."
The bottom line is the value of Comcast's bid and whether Disney shareholders feel they're getting their money's worth. Considering that private equity market assessments of Disney's value come in near $32 a share and run as high as $38, when a premium for control is included, Comcast will have to raise its bid or the deal is dead. After posting solid quarterly earnings, Disney shareholders may feel the future is brighter as a stand-alone company in the middle of a recovery.
"We don't see how
Disney's board takes a price in the $30-to-$35 range, given that the stock can go that high or higher on fundamentals," said Drewry.
Ultimately, Disney's management will control the fate of the deal and may try to squeeze a premium from Comcast behind closed doors. Because of the way that Disney's share base is structured, Comcast will have an extremely difficult time getting them to agree by a consent solicitation or proxy battle.
While the deal may be hostile now, in order to succeed both sides may have to become a whole lot friendlier.
"Disney is something of a unique beast -- it has a very diverse shareholder base. Every mom and pop has 100 shares tucked away in a drawer, so it would be very hard to take the deal directly to shareholders. And Disney holds a lot of stock in its 401(k), which Eisner controls the voting on," said Todd Mitchell, analyst at Blaylock & Partners. "It's hard to put something to the shareholder base and get it passed. You need to have a sanctioned deal."