Commentary: An attractive, and ironic, deal

By Jay Pultz, Gartner Analyst

Comcast's unsolicited offer to buy AT&T Broadband is one more indication that AT&T's cable strategy may have run out of time.

The most salient aspect of the deal would be its irony.

	See news story: Comcast makes bid for AT&T Broadband

In 1999, Comcast had already reached an agreement to acquire another large cable firm, MediaOne, when AT&T swooped in with a better offer. AT&T sweetened that deal by swapping some cable properties that Comcast particularly wanted. However, AT&T was then seen to be the big winner, having bought its way into an industry-leading share with the purchase of Tele-Communications Inc. and MediaOne.

Now, Comcast proposes essentially to buy both companies for about the price it bid in 1999 for MediaOne alone. That proposed deal would have been worth about $60 billion, and AT&T will receive just about that amount in stock ($44.5 billion) and assumed debt ($13.5 billion) if it accepts Comcast's bid.

Gartner believes Comcast has better than a 50 percent chance of pulling the deal off. If so, Comcast would get assets worth some $90 billion when AT&T acquired them. (AT&T actually spent $110 billion on cable properties but sold some to reduce its debt.) Nevertheless, AT&T shareholders may welcome the deal because Comcast's offer for the broadband unit, a relatively small portion of the company, equals about 75 percent of AT&T's total market valuation at the price its stock trades at these days.

AT&T will obviously consider whether it would be better for AT&T Broadband to become a stand-alone company than to sell it now, but shareholders may prefer to take Comcast's firm offer, and AT&T may want to take the opportunity to reduce its large debt.

In any case, Wall Street ran out of patience with AT&T's cable strategy a year ago. By buying up cable networks, AT&T hoped to bypass the stranglehold that the Baby Bells have on last-mile phone lines into people's homes and offices for voice and data services. The technological challenges proved more difficult to surmount than AT&T likely calculated (especially for voice), and the overall investment climate turned very harsh in 2000.

To satisfy investors, AT&T decided in late 2000 to break itself into three separate companies (plus a trading stock for AT&T Consumer Services) and has recently been readying the eventual spinoff of AT&T Broadband.

AT&T hoped the various companies could continue to work together--for example, AT&T Business Services would tap AT&T Broadband for technology to help it deliver enterprise-class services for small and branch offices. A spinoff made this approach less likely to succeed; a Comcast buyout of AT&T Broadband would virtually end it.

Comcast will likely focus on consumers, its traditional strength, rather than businesses. Consumers should view this deal as evidence that the cable industry will continue to consolidate. The trend will be aided by the Federal Communications Commission's relaxation of the rule limiting a company to control of no more than one-third of the U.S. market. With fewer, bigger cable companies on the scene, consumers can expect to pay higher prices.

(For related commentary on choosing an Internet service provider, see TechRepublic.com--free registration required.)

Entire contents, Copyright © 2001 Gartner, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.