Comcast's Waiting Game

The rejected cable giant is betting that time will push Disney's stock price back down to a level that makes its original offer look good

Is Comcast setting a mouse trap for Walt Disney (DIS )? Scarcely 18 hours after hearing that Disney's board had rejected the cable giant's $48 billion hostile bid, Comcast (CMCSA ) sources were putting out the word that it had no intention of increasing the bid on its own. "We're not going to be bidding against ourselves," one source close to the cable giant tells BusinessWeek Online. "We think we put a pretty fair bid on the table the first time."

Moreover, this source says, Comcast's own internal analysis put Disney's value well below the $30 a share or more that some analysts say it would take to pry the Mouse House loose. "If they think we're going that high, someone is smoking something," says a source with knowledge of how Comcast thinks. "This is a company that hasn't traded higher than the mid-$20s for the last three years, so what makes anyone think it's worth more?"

Those are certainly fighting words. And Comcast's cost-conscious Chairman Brian Roberts has made it clear that he's "a disciplined buyer," ready "to walk away form the deal." Or maybe he's just walking around the block. Analysts who cover Comcast figure it's simply waiting for the news of the Disney board's rejection of its Feb. 11 bid to sink in -- along with its own off-the-record comments that it isn't going to bid higher.


  And sure enough: The day after Disney said it was denying Comcast's stock offer because it was $3.60 below Disney's then-trading price, the gap between the two companies widened a bit: Disney's stock price fell by 2 cents, to $26.90, while Comcast's stock rose by nearly 3%, to $30.75. (At the time of the bid, Comcast offered 0.78 of its shares, trading at $33.20, for each share of Disney, which then traded at $24.08).

That original bid valued Disney at $26.47, a 10% premium. Since then analysts have said Disney is worth north of $30 and have hinted that Comcast may have to add some cash to the bid to make it more substantial -- and less risky for Disney shareholders. Merrill Lynch's highly regarded analyst Jessica Reif Cohen, who owns Comcast shares (Merrill in the past has done banking work for both companies) pegged Disney at $32 a share in a Feb. 11 research report.

So the waiting begins. For how long? Veteran media watchers figure Roberts will use Disney's coming Mar. 3 annual meeting (coincidentally in Comcast's home town of Philadelphia) to showcase a new -- and likely higher bid. "That will make the shareholders take note and ask Eisner a lot of questions," says a rival media mogul. "My gut is that they're going to want to see how the market reacts," says Rich Greenfield, an analyst with independent research firm Fulcrum Partners. "And as people start to realize that there aren't a lot of bidders out there, the price will start to come down."


  Still, Greenfield feels "Comcast may have to up its bid," a notion that nearly everyone seems to embrace. "When was the last time you saw someone enter a negotiation with a first and last offer," says a long-time associate of Comcast's Roberts. "Brian has saved some in reserve." Comcast doesn't have a ton of cash on its books -- $1.6 billion as of Dec. 31, in fact -- and it's still laboring under nearly $22 billion of debt left over from its acquisition of AT&T's cable systems. So where would it get the added firepower for the deal?

Most likely, Roberts & Co. would increase their bid to something closer to a single share of Comcast for a share of Disney. As for the cash component, they could raise $3 billion alone by selling Comcast's $1.5 billion stakes in Time Warner (TWX ) and Liberty Media (L ), according to Merrill's Cohen, who doesn't expect a "significantly" higher bid. And Comcast could hit up money-rich Microsoft (MSFT ), already a 7% owner, for some cash in return for added stock that comes with a shareholder agreement preventing the software giant from exercising further control.

A Comcast source says the cable company is wary of having Bill Gates increase his stake, but if it's crucial to get the deal done, Comcast would most likely swallow its corporate pride.


  The big question: Is the merger really that crucial? Roberts has done about-faces on deals before, notably a bidding contest for Denver-based Media One's cable properties. But back then he got a $1.5 billion breakup fee and a prized Philadelphia-based cable system in exchange for dropping his bid. This time, he's talking up the deal on Wall Street, and in meetings with large Comcast shareholders on both coasts.

Complicating matters for Roberts, Disney Chairman Eisner has his board's support and is showing he intends to keep running his company. Indeed, the day after his board rejected Comcast's bid, Eisner announced the purchase of Kermit the Frog and other characters from Jim Henson Co.

All that could change in the coming weeks, as the Mar. 3 annual meeting draws closer. At that point, by Comcast's reckoning, the difference between the two companies' stock prices will have widened further -- making Comcast's shares even more attractive. And Roberts may well apply added pressure by making his bid even harder to turn down.

By Ronald Grover in Los Angeles

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