Comcast Corporation & AT & T Broadband: Comments on Merger

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

Comcast Corporation ("Comcast"), the third largest cable operator in the U.S., announced late Wednesday its successful bid to acquire AT&T Corp.’s broadband unit (AT&T Broadband) for an aggregate enterprise value of US$72 billion, valuing AT&T cable systems at approximately US$4,500 per subscriber. Upon receiving regulatory approval, which is expected by year-end 2002, the newly created AT&T Comcast would be the largest cable operator in the U.S. with 22 million subscribers and a highly clustered network that passes 38 million homes. With the increasing competition that cable operators are facing from the incumbent telcos and satellite operators, plus the highly fragmented nature of the U.S. cable industry, DBRS anticipates that this transaction may be a catalyst for further consolidation. For example, Cablevision, Cox, Adelphia and Charter Communications could potentially be the next acquisition targets.

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. With the additional debt from the merger, AT&T Comcast’s gross debt levels will increase to $29.3 billion ($27 billion on a net basis) and this will likely put near-term pressure on Comcast’s coverage ratios. Based on DBRS estimates, the initial cash flow to debt ratio will likely decline to 0.10 times, EBITDA interest coverage to around 3 times and gross debt to EBITDA will increase to 5 times. However, the Company has the potential to experience significant financial improvements in the future if it can successfully execute the integration, given cost savings and operating synergies with greater economies of scale.

The key strengths of this transaction are as follows:

(1) Scale and size to compete against much larger incumbent telco competition, especially in the launch of new and innovative services to consumers

(2) Expectation of margin improvement at AT&T Broadband given Comcast’s successful track record and experience in running cable operations

(3) Significant cost-saving opportunities involving programming costs and general operating overheads

(4) Adding clusters in key areas, with 79% of subscribers in clusters of 250,000 or greater

However, Comcast will still face several challenges going forward including:

(1) Obtaining regulatory approval at the federal, state and local level which will likely take a year to complete

(2) Execution risk over the short term

(3) Integration of two distinct operating cultures

(4) Significant capital expenditures to upgrade networks