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Comcast proposes to buy Walt Disney
Updated: 2004-02-12 09:11

Cable television giant Comcast Corp., the U.S. biggest cable systems operator, 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 Corp. Executive Vice President David L. Cohen points to chief executive Brian Roberts, left, and Stephen Burke, head of the company's cable division, after a news conference in New York Feb. 11, 2004.  [AP]
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 was set to announce strong 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.

Merger of Comcast and Disney would create an entertainment and communications giant. [AP]
Comcast, the nation's biggest cable systems operator, said it would also assume $11.9 billion in debt from Disney, which also 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. That pressure increased late Wednesday, when Institutional Shareholder Services, an influential shareholder group, recommended against Eisner's re-election to the Disney board, citing "blurred" lines between the board and management.

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.

Comcast Corp., the largest U.S. cable television operator, launched a stunning proposal on February 11, 2004 to buy Walt Disney Co. in a deal Comcast said would value Disney at $66 billion including debt. Visitors walk on Main Street towards the Sleeping Beauty Castle at Disneyland in Anaheim, California in this October 2001 file photo. [Reuters]
The earnings easily beat analyst expectations and, Eisner said in a statement, showed 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 over the past six years or so, has risen sharply over 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.

Comcast also released a letter sent to Eisner indicating that Eisner had personally rejected Roberts' offer to enter into discussions about a merger earlier in the week.

The letter from Roberts called it "unfortunate" that Eisner was not willing to enter into discussions. "Given this, the only way for us to proceed is to make a public proposal directly to you and your board," the letter stated.

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 offer valued 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 may 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.

Disney and Comcast together had $45 billion in revenues last year. If a deal is reached to combine the companies, they would edge out Time Warner, which had $39.6 billion in revenues last year, atop the heap of media and communications companies.

Comcast merged with AT&T Broadband in November 2002, making it the largest cable TV company in the country with 21 million subscribers.

Comcast has several holdings in media content, but has made no secret of its ambitions to acquire more. It has majority stakes in Comcast-Spectacor, the owner of the Philadelphia Flyers and 76ers; Comcast SportsNet, E! Entertainment Television, the Style Network, Golf Channel, Outdoor Life Network and G4.

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