February 11, 2004 4:34 PM PST

Comcast offers $66 billion for Disney

Cable TV giant Comcast announced Wednesday that it was launching a surprise $66 billion bid to merge with Walt Disney, a deal that would create one of the largest media and distribution companies in the world.

The proposal comes after private conversations earlier this week, in which Disney Chief Executive Officer Michael Eisner rejected Comcast's request to begin merger negotiations, the cable company said. As a result, Comcast said it was bringing its offer to Disney?s board of directors into the public eye.

News.context

What's new:
Cable TV giant Comcast launches a surprise, unsolicited $66 billion bid to merge with Walt Disney.

Bottom line:
If completed, the deal would create a media and distribution empire rivaling the size and influence of Time Warner. But first, it has to pass muster in regulatory and public-interest circles.

More stories on this topic

"Given this (rejection), the only way for us to proceed is to make a public proposal directly to you and your Board," Comcast Chief Executive Officer Brian Roberts wrote in a letter to Eisner, made public Wednesday morning. "We have a wonderful opportunity to create a company that combines distribution and content in a way that is far stronger and more valuable than either Disney or Comcast can be standing alone."

Under the proposed deal, the company would issue 0.78 of a Comcast share for each Disney share, a total value of about $54 billion and a premium of about $5 billion above the closing price of the shares on Feb. 10. In addition, Comncast would assume about $11.9 billion in current Disney debt, for a total of about $66 billion. Disney shareholders would own about 42 percent of the company, Comcast said.

If completed, the deal would create a media and distribution empire rivaling the size and influence of the post-America Online Time Warner, and would be sure to raise eyebrows across regulatory and public-interest circles.

Disney's board will "carefully evaluate" the unsolicited takeover bid, the company said Wednesday. "In the meantime, there is no action for shareholders to take" on the offer, said the company, which begins a two-day conference with investors on Wednesday.

A takeover, should it succeed, carries substantial risks for both companies. Recent mega-media mergers are known less for their successes than their failures--for example, the 2002 marriage of America Online and Time Warner and French water utility Vivendi's aborted effort to molt into a media titan by acquiring Seagram's Universal movie, television and music businesses.

Comcast has barely finished assimilating the cable properties of AT&T Broadband, which it acquired in 2001 to become the largest cable TV company in the United States. In its proposal, it cited the recent merger between DirecTV and News Corp. as a model, saying that it would abide by the same Federal Communications Commission rules that led to the approval of that deal.

The company says that the AT&T Broadband deal has helped give it the experience needed to successfully merge with a company Disney's size. In its letter to Disney, Comcast noted that the cable company's president, Steve Burke, is himself a Disney veteran, having served in several top capacities at that company including president of ABC Broadcasting.

Initial reaction from analysts was somewhat skeptical.

"I'm wondering if Comcast is getting into unfamiliar territory," said David Mantell, an equity analyst at Loop Capital Markets. "We've seen them do an excellent job with AT&T Broadband, but to acquire a major entertainment company I think puts them into newer and more unfamiliar territory."

The combined company would be valued at $125 billion at closing share prices on Tuesday, and have 179,000 employees, Comcast said. It would have 21.5 million cable subscribers, own many of the top TV brands-- including ABC and ESPN, all the Disney properties--and have the largest high-speed Internet subscriber base in the United States.

Any deal would require approval from both the FCC and the Justice Department's antitrust division.

Some lawmakers on Wednesday raised concerns that the proposed merger could concentrate too much media control in the hands of one company. Mike DeWine, R-Ohio, the chairman of the Senate Judiciary antitrust subcommittee, said he planned to hold hearings on the deal.

Consumer groups also weighed in on the transaction.

"It's clear that Brian Roberts knows no limits to his media ownership ambitions, having already swallowed AT&T Broadband (which in turn had gobbled up both TCI and MediaOne)," said a statement from Jeff Chester, executive director of the Center for Digital Democracy. "More importantly, Roberts and Comcast fail to appreciate that such heightened media consolidation in cable, broadcast, and online distribution and content is a threat to American democracy."

Visions of a turnaround
In a conference call with reporters and analysts, Comcast executives laid out some details of their vision for the merged company. Disney has tumbled considerably from its financial heights of previous years, and Comcast could help reverse poor operating margins in its cable properties and improve distribution for the company's cable networks, executives said.

The company, Burke also said, would revitalize the prestige of Disney's animation studios and turn around the loss of key partners, most notably Steve Jobs' Pixar animation studio.

Executives said they could improve profit margins in the ABC broadcast network, which has trailed rivals CBS and NBC, by taking a "businesslike approach" to the news business.


News.commentary
Disney deal to reshape
on-demand media

Comcast could use its proposed takeover
of the entertainment company to jump-start
video on demand and other services.


Burke also outlined possible advantages to linking the Disney content properties to Comcast's high-speed Internet and other high-tech businesses.

"We are big believers in video on demand, and we just dream of what the Disney library (and other properties) could do for that business," Burke said. He added that subscription packages for Disney's children's programming, ESPN content or news content would be a natural addition to the high-speed Net business.

Disney has been going through a turbulent period on its board in recent months, as CEO Eisner has fended off attacks from dissident board members including Roy Disney, nephew of founder Walt Disney.

The younger Disney resigned from the board late last year, along with Stanley Gold, another influential board member, who together criticized other directors for bowing too easily to Eisner's will. In his resignation letter, Roy Disney criticized Eisner of micromanaging and driving out talent.

"The company has lost its focus, its creative energy and its heritage," he wrote.

The two former directors aren't alone in their assessment of Disney's declining creative fortunes under Eisner. In splitting with his former distribution partner, Pixar CEO Jobs called Disney's recent animations "embarrassing," and added that he felt "sick" about the prospects of Disney-made sequels to hit Pixar films such as "Finding Nemo."

Roy Disney and Gold have pushed hard for the Disney CEO's ouster, orchestrating a campaign to convince shareholders to withhold their votes from Eisner as well as three other directors at the company's annual meeting next month.

The hostile bid, coupled with board dissent and the collapse of the Pixar deal, are clear indicators that Eisner's grip over the company he's run for the past 20 years may be weakening.

Among other things, Comcast's unsolicited offer challenges Eisner's view that there are few obvious benefits to be had in marrying Disney's vast content libraries with a big distributor such as a cable company--an opinion forged in part after Disney acquired the ABC television network in the late 1990s. That deal has been widely criticized for hurting the value of both companies.

Roberts said he had not yet been in contact with Roy Disney, other dissident former board members or other critical shareholders.

Despite an initial tumble in Comcast's own share price on the news, Roberts said he expects support from the shareholders and that the company has all the tools it needed to pursue the merger.

"This seems like the logical next step for a premier distribution company to get into content," he told analysts. "I think the new company would be spectacular, competitive, a leader in its space, and financially solid."

Reuters contributed to this report.

 

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