AT & T Broadband & Comcast Corporation: Comments on Merger

Rory Buchalter, Chris Diceman / 416-593-5577 ext.2268, ext.2242 / e-mail: rbuchalter@dbrs.com

AT&T Corporation ("AT&T") announced yesterday that it would it accept a bid from Comcast Corporation ("Comcast") to acquire AT&T’s broadband unit ("AT&T Broadband"). The transaction will consist of: (1) Comcast issuing $47 billion in equity; and (2) the new entity assuming approximately $17.3 billion in AT&T Broadband debt, $2.6 billion in other long-term liabilities as well as $5 billion in convertible preferred shares. Upon receiving regulatory approval, expected by year-end 2002, AT&T Corp. will have completed its transformation back to a provider of wireline and data services focussed predominantly in the U.S., having spun off its wireless operations, dissolving its Concert joint venture with British Telecom and now selling its broadband operations.

With the new AT&T Comcast assuming $17.3 billion in debt, AT&T’s net debt level will decrease to approximately $18 billion. However, it is too early to determine whether AT&T’s debt to capital ratio will improve, as it depends on exactly how much equity is attributed to AT&T Broadband as part of the spin off that is required prior AT&T Broadband being merged with Comcast.

The Company’s coverage ratios are expected to initially improve with the debt reduction, with DBRS estimated that cash flow to gross debt will increase to the 0.35 level, while EBITDA gross interest coverage will increase to back to the 7 times range. These ratios are expected to decline going forward due to the continued pressure that AT&T is experiencing in both its consumer and business segments.

In contrast, AT&T’s business risk profile is anticipated to increase with the sale of its broadband assets as AT&T will lose one of its most coveted assets, last mile access to nearly 24 million U.S. households. AT&T will now become much more dependent on its data/IP operations to generate growth, and this segment is currently under pressure due to the economic downturn constraining IT spending and the intense competition that exists in the corporate data market. In addition, AT&T’s consumer long distance business continues to experience declining cash flow as it loses market share to the "baby Bells". However, given its strong brand name and numerous customer relationships, AT&T Corporation may become an attractive takeover candidate, especially for a firm looking to increase its U.S. presence.