Thursday, February 12, 2004

Comcast bids $66B to swallow Disney

Analysts think that too little

By Gary Gentile
The Associated Press

ORLANDO, Fla. - Cable television giant Comcast Corp. made a surprise bid for The Walt Disney Co. that would create the world's biggest media conglomerate and likely spell an end to the 20-year career of Disney chief Michael Eisner.

Comcast, which said Eisner had rejected the idea of private talks, stunned the media world with its announcement early Wednesday. It was made just before Disney started two days of meetings with analysts at its flagship Walt Disney World theme park and hours before Disney announced strong fiscal first-quarter earnings.

The bid was initially valued at $54 billion, but investors bid up the price of Disney stock beyond the Comcast offer - a signal that Comcast would have to sweeten its bid to be successful.

Disney's board released a statement saying it would "carefully evaluate" Comcast's offer. But the board cautioned shareholders not to take any action in the meantime.

Comcast is moving at a time that Disney is struggling with internal strife over corporate governance concerns and Eisner's plans for succession, as well as lagging performance at key businesses such as ABC.

Disney shareholders will gather for their annual meeting March 3 in Philadelphia, where, coincidentally, Comcast is based.

Comcast, the nation's biggest cable systems operator, said it would also assume $11.9 billion in debt from Disney, which owns ESPN, movie studios and theme parks.

The proposal came as Eisner is fending off criticism from former board members Roy E. Disney, the nephew of Disney founder Walt Disney, and Stanley E. Gold about his performance and lack of a succession plan as Disney's chief executive.

Comcast said Eisner declined earlier this week to discuss a possible merger.

"This is a very exciting moment," Comcast CEO Brian Roberts said in a conference call with investors and analysts. Roberts said the combination "would create one of the world's premier entertainment and communications companies, and, we believe, restore the Disney brand to prominence and the company to growth."

As if to answer the bid, Disney released its first-quarter earnings hours before originally planned.

The earnings easily beat analyst expectations and, Eisner said in a statement, showed that the company was firmly on a turnaround that would see 30 percent earnings growth this year and double-digit growth until at least 2007.

Eisner made a brief reference to the bid at the beginning of a conference call to discuss the earnings, saying the board had asked Disney's management and advisers to "to provide an in-depth analysis of the proposal to enable the board to respond appropriately."

Analysts said the combination made sense, but questioned whether Comcast would sweeten its offer sufficiently.

"Strategically, from Comcast's point of view, it would be a terrific move," said Janna Sampson, co-manager of the AmSouth Select Equity Fund and director of Portfolio Management at Oakbrook Investments. "I think it's probably not a good deal for Disney shareholders at the price on the table today."

Analysts were not surprised that Comcast, which has access to cable subscribers, would be interested in Disney, with its suite of top-rated cable channels and visible brand.

But they were taken off guard by the timing. Disney's stock, which has lagged in the past six years or so, has risen sharply in the past 12 months, and earnings have also climbed on the strength of Disney's film slate and a turnaround at its theme parks.

But Eisner has been under heavy pressure as talks to extend Disney's lucrative deal with Pixar Animation Studios collapsed and dissident shareholders raised questions about the independence of Disney's board.

"It's going for the jugular," said Paul Kim, senior media analyst at Tradition Asiel Securities. "He (Roberts) is using this vulnerable time to force Disney's hand."

Kim also said Comcast is basically a cable company and might be biting off more than it can chew. "I think they underestimate the complexity of being a broad-based media company," he said.

In a conference call Wednesday, Comcast's Steve Burke, the head of the company's cable division and a former Disney executive, sounded many of the same notes as dissident shareholders Roy Disney and Stanley Gold.

"We think restoring Disney animation to its rightful place is important," Burke said, echoing a major criticism levied by Roy Disney. "Our goal would be to again place Disney animation in the center of the company."

Burke also criticized Disney's $5.3 billion purchase of Fox Family Worldwide, a deal Eisner has admitted was a mistake at that price. The company has not succeeded in boosting ratings or profits at its renamed ABC Family Channel.

"We believe it operates at around break-even," Burke said. "We can help address this underperformance."

In a news conference in New York, Roberts said he hoped to make the deal "as friendly and amicable as possible, as fast as possible," but he also noted that he was ready to abandon the proposed merger if need be.

"We've walked away from big things before. Life goes on," Roberts said.

Under the merger, Comcast said it would issue 0.78 of a share of its Class A stock for each Disney share, and Disney shareholders would retain 42 percent of the combined company. The deal values each Disney share at $26.49, a 10 percent premium over their closing price Tuesday.

That's a relatively small premium for a takeover offer, but Comcast might be counting on the fact that other potential suitors in the media industry would surely face tougher regulatory scrutiny in Washington. Most of Comcast's holdings are in cable TV systems, while Disney's are in broadcast, cable and "content" businesses like movie studios.

In a sign that investors expect an extended fight, Disney's shares shot up $3.52, or 15 percent to $27.60 in very heavy trading on the New York Stock Exchange, above Comcast's current offer. Comcast's Class A shares tumbled $2.70, or 8 percent, to $31.23 on the Nasdaq Stock Market.

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