AT & T Broadband & Comcast Corporation: Comments on Proposed Merger

Peter Schroeder, Ben Chim / 416-593-5577 ext.2279, ext.2284 / e-mail: ps@dbrs.com

DBRS believes that the credit implications of the proposed Comcast-AT&T merger are neutral to Comcast over the long term, despite a significant increase in debt levels and the likelihood that Comcast will become cash flow negative over the near term, should this transaction be completed. In addition, DBRS believes Comcast’s, credit profile may improve over the long term if the Company is able to execute, given cost savings and operating synergies with greater economies of scale, and improved market positioning enabling Comcast to better compete against much larger incumbent telco competition. Overall, as previously outlined in our recently released cable study, regardless of the ultimate outcome of this transaction, this announcement may trigger further rationalization in the cable industry in the U.S.

The key strengths of this transaction are as follows:

1. Scale and size to compete against much larger incumbent telco competition
2. Expectation of significant margin improvement at AT&T Broadband given Comcast’s track record and experience in cable
3. Capex savings with better purchasing power
4. Significant cost synergies
5. Better clustering in key areas
6. AT&T shareholders would gain majority control of a much stronger and larger company
7. IPO risk of AT&T Broadband, which was proposed to occur in 2002 can be avoided

Despite these strengths there are several hurdles that Comcast must overcome:

1. Execution risk over the short term
2. Regulatory approval will be difficult and lengthy given a full review at the state, federal and local level. This would take in excess of a year to complete.
3. Managing this sizable Company will be difficult, with significant integration risk over the near term
4. Capex will remain high as both operators still require significant capex for upgrades
5. The new entity will not be regionally clustered, with additional asset swaps likely required
6. Comcast will likely become cash flow negative over the near term, causing liquidity risk to increase.

Comcast Corporation, the third largest cable provider in the U.S. with over 8.5 million basic subscribers, announced today the proposed merger with AT&T Broadband, the largest cable operator in the U.S. with 13.5 million basic subscribers. The proposed transaction would cost Comcast a total of $58 billion for AT&T’s cable subscribers. This includes $13.5 billion in new debt, and $44.5 billion in equity, bringing its total debt to $24.7 billion on a consolidated basis. Should this transaction be completed, Comcast would become the largest cable operator in the U.S. with 22 million subscribers and a formidable competitor against much larger incumbent telco competition. In addition, this would position Comcast in 41 states, with clusters in 18 of the top 20 markets in the U.S.