The first round of Cable Cat v. Content Mouse ended in a rebuff, with Disney's board telling Comcast thanks, but no thanks for the $56 billion hostile takeover bid.
On Monday, the Walt Disney Co. board of directors unanimously rejected Comcast's offer of .78 of a share of Comcast for each share of Disney. The board responded that the offer was about $3.60 short of Disney's per-share market price, or around $7.3 billion total.
Part of the reason for the shortfall is that immediately after Comcast made its bid on Feb. 11, Disney shares rose and Comcast stock fell. While most analysts agree that last week's play by Comcast was the first in a series of maneuvers to take Disney, Doc Horn and Rich Greenfield of the Fulcrum Group see the cable giant on shaky ground.
"This situation is really tricky," said Horn and Greenfield in a co-authored analysis of the aftermath. "If Comcast moves the exchange ratio from the current .78 to say 1:1, Comcast stock is likely to fall even further. If Comcast offers a higher price with some or all cash, it is more dilutive and Comcast becomes a leveraged entity, exactly what it has tried to dig itself out of post-AT&T Broadband."
Comcast is valued at $67 billion and has around 82,000 employees. The cable company generated $18.4 billion in revenues in 2003, with an operational net loss of $218 million -- 54 percent less than the previous year when Comcast absorbed AT&T for $29 billion.
Disney is valued at $55 billion and employs around 112,000 people. The company turned a $1.3 billion profit in fiscal '03 on revenues of $27 billion.
Greenfield and Horn said although Comcast will more than likely come back with a bid that's "modestly higher, with a cash component," they questioned the wisdom of the pursuit.
"Disney is not a great company, so paying more appears crazy if you're Comcast," the analysts wrote. "They offered a fair price, but Disney investors are looking for a private market value, during a period of rapid earnings recovery (which gives us pause as to why Comcast tried to do this deal now)... in essence, we believe Disney investors are seeking an unrealistic price -- but are caught up in the earnings momentum."
On the flipside, ratings are down at Disney-owned ABC, blockbuster CG-house Pixar ("Finding Nemo") is abandoning the fold and Roy Disney, dissident former board member and nephew of the founder has been leading a revolt to ouster Chairman Michael Eisner.
Add to the mix the potential benefits of the merger. Neither company would have to go through the endless multibillion-dollar carriage negotiations over Disney's stable of networks -- ESPN, Disney Channel, ABC, ABC Family, SoapNet among others.
Comcast would also get access to Disney's theatrical machine, which would be a huge boost for the MSO's video-on-demand business, and something the company could parlay into a driver for its cable modem business. Content for both VOD and broadband has been hard to come by, and Comcast CEO Brian Roberts has publicly bemoaned Hollywood's resistance to providing it.
The technological road to delivering VOD over cable, for example, was paved with a substantial amount of Comcast capital, only to be launched in 2002 with a slate of mostly B-movies and relics a la "Young Frankenstein." As selection has improved, so has traffic. Where early per-subscriber take-rates were about two or so movies per month, it's now around 15 per month at $1.95 to $3.95 per rental.
Disney content could also be incorporated into Comcast's broadband business -- the fastest growing segment of the company. On average, Comcast had net growth of 32 cable modem subscribers per week in 2003, compared to 19.75 digital subs and 3.25 basic subs, according to a report from SG Cowen. Disney already took a major step down the broadband path when it announced a digital rights management alliance with Microsoft, a major shareholder of Comcast. The Disney-Microsoft deal went down two days before Comcast made its bid.
Eisner was outwardly cavalier about the takeover attempt, reportedly telling a group of analysts in Los Angeles that Disney had actually tried to buy Comcast. Nonetheless, Disney brought in New York attorney Martin Lipton, architect of the so-called "poison pill," a financial form of defense against hostile takeovers.
Disney employees are pulling for a Comcast takeover, according to one long-time insider who remembers when Cap Cities bought ABC in 1985. Not unlike Brian Roberts, who has a cash-laden friend in Microsoft Chairman Bill Gates, the chiefs at Cap Cities had uber-investor Warren Buffet in their corner when they went after ABC.
Dan Burke was one of the top men at Cap Cities who led the charge to buy ABC, then valued at about 30 percent more than Cap Cities. Buffett laid out $500 million for the deal. Under Burke and his colleagues, ABC flourished.
Then in 1995, Cap Cities/ABC was bought for $19 billion by Disney, where Burke's son, Steve, was put in charge of the station and syndication group. In 1998, Steve Burke left Disney to become president of Comcast Cable.
A Disney shareholder meeting is scheduled for March 3 in Philadelphia, according to published reports.
