Comcast Corporation & AT & T Broadband: Comments on the FCC’s Approval of Merger

Peter Schroeder, Rory Buchalter / 416-593-5577 ext.2279, ext.2268 / ps@dbrs.com

 

Summary:

Yesterday, the Federal Communications Commission (“FCC”) granted conditional approval on the application of Comcast Corporation (“Comcast”) and AT&T Broadband (“AT&T”) to transfer cable licences and merge operations.  The FCC determined that competition will not be impacted by this merger.  The only requirement outlined by the FCC is the divestiture of AT&T’s interest in Time Warner Entertainment, L.P. (“TWE”) within five-and-a-half years.  Furthermore, TWE is to be immediately placed into a trust on the day the merger closes. 

 

Background:

The combined entity of AT&T Broadband and Comcast Corporation will have approximately 21.6 million customers (8.5 million at Comcast and 13.1 million at AT&T) and 60,000 employees.  The purchase price by Comcast was valued at $72 billion when the deal was announced in December 2001.  The $72 billion price consisted of $47 billion in stock and $25 billion in debt assumed.  DBRS expects it will take 12 to 18 months to fully integrate operations and coordinate marketing efforts.  At that time, the newly created AT&T Comcast will become the largest cable provider in North America.

 

Conclusion:

DBRS believes the operational challenges and scale of this merger are immense and represent significant execution risk over the near term.  Success will depend on the ability of Comcast’s management to drive costs out of the system and fully integrate operations.    Furthermore, given the state of the AT&T Broadband network and significant capex requirements going forward, AT&T-Comcast will struggle to reach positive free cash flow over the near term.  However, given the current regulatory advantages of cable over telco competition, AT&T Comcast will eventually represent viable competition to the RBOCs (U.S. incumbent telcos).  The combined AT&T-Comcast will have systems located across the U.S. from Baltimore, Maryland - Seattle, Washington - San Francisco, California – Jacksonville, Florida – Chicago, Illinois.  Although this national footprint has its advantages, it also creates networks, which are non-clustered and isolated.  The degree of network fragmentation for all cable providers in the U.S. remains a concern that will need to be addressed.  The completion of this merger should help to stimulate further merger activity and network swaps, which should help restore investor confidence.