business

A Rude End to AT&T's Pipe Dream

The happy face Chairman Mike Armstrong is putting on the $47 billion sale of Ma Bell's cable unit to Comcast can't hide some grim truths

By Steve Rosenbush

It was an older and wearier Mike Armstrong who took to the podium to announce the sale of AT&T's cable unit to Comcast late on Dec. 19, six months after Comcast's original and unsolicited $44.5 billion bid. Since then, AT&T and its bankers had tried mightily to find a way out of selling to rival Comcast, which had lost a late-'90s bidding war for MediaOne to AT&T. But the telecom giant managed to coax only half-hearted offers from Cox, AOL Time Warner, and Microsoft. And when management suggested it might just keep the cable business for itself, investors punished AT&T in the stock market.

So Comcast finally won the battle with a revised bid of $47 billion. Even Armstrong, AT&T's famously energetic chairman, was exhausted. "The process was fair and rigorous, but as [CFO Chuck] Noski said, the process had lost its charm, and we were looking forward to implementing this," Armstrong said during a press conference.

AT&T proclaims the deal a financial and strategic success. The company said it acquired the TCI and MediaOne cable companies for an average $4,100 per subscriber and sold them to Comcast for $4,500 per subscriber. AT&T says the deal will also accelerate the deployment of digital TV, cable telephony, and cable-modem service over lines that AT&T upgraded. But the reality is a bit more complex.

DO THE MATH.

  In financial terms, AT&T's cable investments simply haven't paid off. It's accurate to say AT&T paid an average $4,100 per subscriber and that it sold the cable unit for an average of $4,500 per subscriber. But AT&T's cable unit also included assets like Excite@Home, the value of which was wiped out. The original purchase price for the cable systems, including subscribers and other assets, was $110 billion. AT&T sold off cable assets in Europe and the U.S., including a stake in Cablevision. AT&T says it got as much as $45 billion for them, but some analysts believe the figure was lower. Its capital expenditures on the network ranged anywhere from $2 billion to $4 billion.

AT&T spokeswoman Eileen Connoly says the sale of the international TCI and MediaOne assets that AT&T didn't want netted about $25 billion. AT&T raised an additional $5 billion by selling its stake in Cablevision, and Rainbow netted about $1.4 billion. She says the numbers have been confirmed by auditors and shared with Comcast executives, who didn't dispute them. But the complete breakdown of the money that AT&T raised by selling the cable assets can't be made public, because the price of some deals like Telewest was never disclosed.

And it's not clear that AT&T made a profit. AT&T values the Comcast sale at $71 billion, including the $20 billion in AT&T debt that Comcast is assuming and the estimated $8 billion it's paying for AT&T's stake in Time Warner Entertainment. Even if AT&T received $4,500 for each of its 14 million subscribers, that works out to only $63 billion. At best, it still means AT&T barely broke even or made a small profit.

CABLE-PHONE POWER?

  "I am not sure they made a profit on it...I think Armstrong paid a little too much for cable," says analyst Tom Egan of UBS Warburg. Another analyst, Lara Warner of Lehman Bros., estimates that the costs to Comcast of these assets is $4,300 to $4,500 per subscriber, depending on how much money Comcast raises from the sale of AT&T's 25.5% stake in Time Warner entertainment, including cable. And even though the Time Warner assets are valuable, it's far from certain what they'll fetch during an economic downturn.

As for the strategy of becoming a cable-telephony powerhouse, it's way too early to proclaim that a success. Comcast President Brian Roberts says he'll pursue cable-phone service in 2003, but only if it makes economic sense. Says Roberts: "It will take 5 or 10 years to judge whether this works or not, not 5 or 10 weeks."

Armstrong argued the merits of the deal with his usual vigor. And while he looked as tanned and fit as ever, anyone who has followed his career the past few years couldn't help but conclude that the delivery was just a little flat. He argued that the decision to spin off the cable unit was an affirmation of the strategy that he embarked upon when he bought TCI and MediaOne several years ago. "This accelerates our strategy...I am not only satisfied, I am excited about the outcome."

That may be, but Wall Street shrugged. By the middle of the trading day on Dec. 20, AT&T stock had risen 6.5%, to just under $18 a share -- well below the $21.50 at which it was trading when Comcast first made its bid. And from a balance-sheet perspective, this deal is ending with a whimper, not a bang.

Telecommunications Editor Rosenbush covers AT&T for BusinessWeek in New York

Edited by Beth Belton

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