Comcast Plays Spoiler

Barry Diller had long told Brian L. Roberts that cable operator Comcast Corp. needed to move aggressively into programming.

But this wasn't quite what Diller had in mind.

On July 12, Roberts broke the news to Diller that he had launched a takeover bid for Diller's company, QVC Inc. Roberts insists that the hastily arranged meeting at New Jersey's Teterboro Airport was cordial. The two executives even shared a car into Manhattan afterward. Yet Comcast's stunning move means turmoil for Diller and everyone else involved in QVC's complex web of business relationships.

First, there is the home-shopping channel's proposed merger with CBS. Laurence A. Tisch, the chairman of CBS Inc., scotched that deal within hours of being notified about Comcast's $2.2 billion tender offer and one day before the CBS board was scheduled to ratify its merger with QVC. Instead, CBS announced on July 13 that it will buy back 3.5 million shares for a total of $1.1 billion. Tisch, who owns 3 million CBS shares through his Loews Corp., plans to tender all of his stock to the offer. That means the 71-year-old investor will cash out at least $220 million of his CBS stake, even though he hasn't resolved the issue of who should succeed him.

NO MUSCLE. Then there is Diller, who will probably be out of a job if Comcast ends up with QVC. Executives close to Diller say he is likely to reject Comcast's offer to stay on as chairman of the operation. For consolation, Diller can dwell on his own share of the Comcast buyout: In just 18 months, he made an estimated $75 million pretax profit on his initial $25 million investment.

But without QVC's muscular balance sheet backing him, it will be harder for the 52-year-old programming whiz to strike the kind of megadeal he has craved since leaving Rupert Murdoch's Fox Broadcasting Co. in 1992.

Finally, there is Roberts, who is betting that his family-controlled cable company can acquire and successfully operate QVC without Diller. Coming a month after Comcast agreed to put down $1.2 billion for the U.S. cable systems of Canada's Maclean Hunter Ltd., the QVC deal will stretch the nation's third-largest cable operator to the limit.

Comcast owns 15% of QVC, so it needs to raise about $1.86 billion to buy out Diller and other QVC shareholders. Roberts says the company will sell assets, such as its 20% stake in the Heritage cable company, to help pay for the cash-and-stock offer. Analysts say Comcast may also renegotiate its stake in Nextel Communications Inc., a cellular-phone provider. And Roberts may take on a partner, such as a Baby Bell, for either the QVC or Maclean Hunter deal. Senior Vice-President John R. Alchin says that while Comcast's total debt will jump from $3.8 billion to $6 billion (table), QVC's $125 million in annual cash flow will allow it to maintain its current debt-to-cash-flow ratio.

Most analysts believe Comcast can pull off the deal. But Jessica Reif of Oppenheimer & Co. says that with the new debt from QVC, Roberts may not be able to afford his goal of boosting Comcast's cable subscribers to 5 million. "Is this the best use of his cash?" she asks.

For Roberts, such a prospect is still more palatable than seeing Comcast's 15% stake become a 4.9% stake in a combined CBS-QVC. "The sale of QVC to CBS, which this was clearly going to be, would have made us a disenfranchised minority investor," says Roberts. He points out that Comcast would have been barred from a board seat at CBS. And government regulations would have prohibited Comcast from ever boosting its stake above 5%.

BIG LEAGUES. To understand the motive behind Comcast's stunning move, consider the lofty ambitions of 34-year-old Brian Roberts. The Roberts family controls 78% of Comcast's voting stock. And Ralph J. Roberts, who founded the Philadelphia-based company, fully supports his son's efforts to vault Comcast into the major leagues of cable programmers. It was Brian who lured Diller to QVC in December, 1992--betting that Diller would do the job.

Instead, Diller used Comcast's clout to advance his own agenda. First, he secured $500 million from Comcast to support QVC's bid for Paramount Communications Inc. When that failed, Diller struck the CBS merger deal--over the strident objections of Roberts. Comcast didn't want QVC to veer from cable to broadcasting, and the relationship between Diller and Roberts began to fray. Days after Diller unveiled his CBS deal, Roberts hired Steven Rattner, a banker at Lazard Frres & Co., to structure a tender offer for QVC.

Roberts won't criticize Diller publicly. But privately, people close to both executives say the two have steadily drifted apart. Diller ended up paying little attention to QVC's core retailing business, while Roberts remains excited by home shopping.

In many ways, the Comcast bid represents the final break in the combustible partnership of Diller, Roberts, and Tele-Communications Inc. President John C. Malone. Liberty Media Corp., which Malone also controls, still owns 16.2% of QVC. And until several months ago, Malone was one of three voting shareholders of QVC, along with Diller and Comcast. After Malone sprang his failed merger of TCI and Bell Atlantic Corp., though, he withdrew from his voting position in QVC. Malone's deal caught Diller and Roberts--who were immersed in the Paramount takeover--by surprise. Similarly, Roberts didn't inform Malone of his plans this time. "This is just tit for tat," says Oppenheimer's Reif.

Still unclear--but the subject of endless speculation--is Malone's next step. Executives close to him say he wanted the CBS deal to go through. Analysts don't expect him to mount a rival bid for QVC because of antitrust concerns. Still, some observers think Malone may hold out for a better price for his QVC shares. At $44 per share, Comcast's offer is a scant premium over the stock's current price of $42. Also unclear is Diller's next move. With $75 million in his QVC profits, Diller could very well ally with someone else to mount another bid for CBS. By spending $1.1 billion on a stock buyback, followed by a five-for-one share split, Tisch is clearly trying to make the Tiffany Network an easy acquisition--reducing CBS's share price and taking the $1.1 billion off its balance sheet.

Media executives say Diller will get plenty of offers to do just that: "If you're Barry Diller, you've got almost $100 million in your pocket, and everybody already knows CBS wants you, who's not going to make you a proposal?" asks Christopher Dixon, a PaineWebber analyst.

Observers say Tisch had better hope for such a scenario. In a statement, Tisch pledges that "CBS will remain aggressive, future-oriented, and highly competitive." But analysts agree that the failed QVC merger badly hurts CBS, since it lays bare the network's strategic drift. Executives close to CBS say its employees are deeply demoralized.

They may not have to wait long for better news. Industry sources say Walt Disney Co. and Turner Broadcasting System Inc. are both considering fresh bids for CBS. So even as media watchers sift through the collapse of the CBS-QVC merger, another round of deals may be in the works. In today's frenzied media business, tectonic shifts happen more frequently than changes in the television ratings race.

      Comcast Corp.'s surprise $2.2 billion bid for QVC leaves Barry Diller without a CBS merger--and probably without a job. Where would it leave Comcast? Almost doubled in size, but with a mountain of new debt
                  IQVC & COMCAST, COMBINED
                      TOTAL REVENUES
                        $3 billion
                    OPERATING CASH FLOW
                       $920 million
                        TOTAL DEBT
                        $6 billion
                        3.5 million
      -- 300,000 cellular telephone customers through an interest in Metrophone
      -- 13% of Nextel Communications, an alternative cellular provider
      -- 17.5% owner of Teleport, a fiber-optic system in 11 cities
      -- Small equity stakes in E! Entertainment Television and Turner Broadcasting System
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