Comcast's Hostile Tango

Comcast (Nasdaq: CMCSA  ) dropped a bomb Wednesday morning, offering $54.1 billion in a hostile bid to acquire Disney's (NYSE: DIS  ) equity, with the total bid including assumption of debt exceeding $66 billion.

Comcast's bid stipulates that the company would issue 0.78 shares of its Class A stock for each Disney share. If the combination goes through, the implications of this deal on the entertainment market are unbelievable. Comcast's CEO Brian Roberts described the combined entity as being "uniquely positioned to take advantage of an extraordinary collection of assets."

Extraordinary is right. People tend to think of Disney in terms of one or two of its parts, most notably its theme parks and movie assets. A combined entity would include a cable and broadband empire spanning 21 million homes, more than 1 million cable telephony customers, 5 million high-speed Internet customers, a massive theme park portfolio, channels including ABC, ESPN, Comcast Sports, Disney Channel, E!, the Golf Channel, movie studios, cruise ships, Disney and Touchstone movie production, Disney's toy properties, and a substantial vault of cartoons and movies. That's some revenue stream, and the potential for cross-marketing is astounding.

Certainly folks at Cox (NYSE: COX  ) , Cablevision (NYSE: CVC  ) , and other cable companies will be watching with interest. If Cox thought it had troubles negotiating with a Disney-run ESPN, imagine how uncomfortable it would be if the sports network of record were a member of Comcast's tribe.

Courting Disney
Based on closing prices, the deal offers a paltry 9.8% premium for Disney shares, or $26.46 per share. In the first hour of trading, Disney's stock leapt more than 15%, to $27.80, while Comcast's dropped 9% to $30.78. Under those conditions, Disney's being courted at a conversion price lower than its close yesterday, and its stock is trading at a 15% premium to the offer at this moment. Of course, conditions will continue to change, and there are a huge number of moving parts here. Just to complicate things, both Disney and Comcast reported quarterly earnings this morning.

Comcast mounted its hostile bid after Disney CEO Michael Eisner rebuffed Roberts' approach last week to explore a merger. Simultaneous with the bid announcement, Comcast released a letter that it had sent to Eisner explaining the rationale for the takeover. Eisner owns little more than 1% of Disney's shares, so while his continued opposition might make approval somewhat more difficult, he doesn't necessarily wag the dog. This bid, however, comes at an extremely uncomfortable time for Disney's management.

Over the last decade, there has been some consensus on Disney's management team that it has underperformed. The stock sits at the same levels it first reached in 1997 as several of its peers have grown substantially. Disney's had a great year, thanks in no small part on movie successes such as Pirates of the Caribbean and Finding Nemo, but its talks with Nemo partner Pixar (Nasdaq: PIXR  ) broke down in acrimony last month.

Speaking of acrimony, most troubling for the company may be the pressure former board member Roy Disney is placing on the board. Roy, who is Walt Disney's nephew and the last remaining Disney family member on the board, resigned late last year, and has since waged a public campaign to convince shareholders to withhold support for Eisner and three other board members in the upcoming proxy. The board has issued numerous votes of confidence for Eisner, and yesterday further stated that they were working on a plan of succession for when the 61-year-old Eisner retires. This morning, the board announced -- as it should -- that it would seriously evaluate the Comcast bid.

Is it possible that some might be persuaded to support the bid to get out of the line of fire between Eisner and Disney? If the deal makes sense, it certainly might tip the scales.

When $66 billion is actually cheap
That's what makes the timing of Comcast's bid so smart. They recognize that the multiple sources of turmoil at Disney have exacted a toll, and are attempting to buy some of the world's most valuable brands on the cheap. Yes, sometimes $66 billion may actually be "cheap." Here's why. Whether it is deserved or not, there is substantial distaste among many investors as to Michael Eisner's lucrative pay packages. He is the only member of the Fortune 400 wealthiest who acquired his wealth based on managing, not founding, a company.

In the last few years, Berkshire Hathaway (NYSE: BRK.A  ) sold out of its long-held Disney stake, a move seen by many as Warren Buffett's own way of expressing disgust with management. Disney has struggled to turn around ABC, and its most recent animated feature films have performed poorly at the box office. Enter Comcast, offering a dreamy distribution system for Disney's dreamy content and sporting a sterling record of delivering corporate value following past takeovers -- including AT&T Broadband. In this way, the merger is intriguing, even if the merger price is not.

Naturally, there will be plenty of antitrust considerations, with the combined network controlling eight out of the 10 largest cable markets, as well as dozens of channels and content that it sells to other cable and satellite networks. The "and satellite" component, however, may be what gives the deal some cover -- though cable companies may control one entertainment conduit into American homes, they don't control all of them.

From a strategic standpoint, this deal is actually quite similar to the recent agreement for News Corp. (NYSE: NWS  ) to acquire Direct TV, though the roles are reversed. Cable companies have spent billions of dollars upgrading their networks to digital in order to drive high-speed data, high definition television services, video on demand, and other high-throughput services. But the technology isn't the driver of the consumer upgrade cycle -- the content is.

By taking advantage of weaknesses at Disney, Comcast could salt away one of the most powerful content providers of all. Similarly, the company took pains to take Eisner at his word that one of Disney's key aims is to aggressively pursue technological innovations for delivery and enhancement of its content. Massive in-house cable network? Check.

Comcast may be attempting to pay very little, but I'd suspect that now that the game is on, they'll be willing to pay much more. That's what the market is suggesting, as the Disney share price far exceeds the offer on the table.

Conclusion
What will happen now? Disney tells its shareholders that they should do nothing at the moment. We'll see very soon whether the board accepts or rejects the bid, though any eventual merger completion could take more than a year. The market, by immediately pushing Disney's price well over that of the Comcast equivalent, has already prognosticated that further bids or concessions are possible. Disney also has the right to reject all offers, but given the aforementioned turmoil and shareholder displeasure, this may prove difficult.

In some ways, there's an element here of the final realization of the vision of Michael Armstrong. When last seen, ex-CEO Armstrong was in the process of breaking apart the AT&T (NYSE: T  ) assets he had spent the previous decade accumulating. Armstrong went with AT&T Broadband, which soon thereafter merged into Comcast. Armstrong took over as chairman of the combined companies. He was widely criticized for having brought AT&T to its knees, but at the time I had a different take -- Armstrong saw the upcoming weakness in the long-distance telecommunications business, and attempted to diversify the company's revenue streams in anticipation. AT&T's failure was in execution, not in vision.

Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards

How will the Comcast/Disney drama affect Motley Fool Stock Advisor recommendations Time Warner (NYSE: TWX  ) and Pixar (Nasdaq: PIXR  ) ? Join David and Tom Gardner and the thousands of Stock Advisor subscribers to find out!

Of course, Bill thinks that the viewing public completely missed the boat on Treasure Planet. He owns shares of Disney and Berkshire Hathaway. Please viewhis profilefor the rest of his holdings. The Fool has a disclosure policy.


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