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Comcast bids $66 billion for Disney empire


A surprising and unsolicited offer yesterday by cable television giant Comcast Corp. to take over Walt Disney Co. could create the largest and most pervasive media conglomerate in the world.

Analysts said the $66 billion deal could make another unusual addition to the merger-crazed industry of entertainment and communications: good business sense.

The marriage of America's largest cable television provider with the storied production studios of Disney, while hardly unique in its attempt to merge the creation and delivery of television content, would be the biggest leap yet toward a future that some industry observers consider inevitable - complete "vertical integration" of American entertainment.

Comcast hopes to use Disney's vast programming menu, which includes ABC, ESPN and several movie production units, as the foundation for an interactive cable service that could pipe movies, news and entertainment programming into households on demand, allowing Comcast to control - and profit from - the experience from beginning to end.

Recent history is filled with warnings about the pitfalls of merging companies from opposite ends of the media food chain, such as the troubled unions that created AOL Time Warner Inc. and Vivendi Universal, but Comcast executives say that technology and the industry have matured enough to allow such a merger to work.

Industry observers say they might be right - in theory, if not in multibillion-dollar reality.

"It's a combination that would make sense," said David C. Joyce, an analyst for Guzman & Co. in Miami who follows both companies. "Disney's investors have been asking for a long time when the company would buy the pipes into people's homes to deliver their entertainment programming and content, but they were always told the timing wasn't right. For the right price, this would be the right time."

Far from certain

A Comcast/Disney merger is far from a certainty and faces an array of corporate and regulatory obstacles, foremost among them being Disney's own executives and shareholders.

Comcast's $66 billion takeover offer - a stock swap initially valued at $54 billion, plus the assumption of about $11.9 billion in debt - was made despite the objections of embattled Disney CEO Michael Eisner, who personally rejected an overture from Comcast earlier this week.

By going over Eisner's head and delivering an offer directly to Disney's board of directors yesterday, Comcast initiated a takeover bid that could turn hostile.

The offer seemed timed to exploit a perceived weakness inside Disney's boardroom, where Eisner is battling with some of his own shareholders - including Roy Disney, a former director and nephew of company founder Walt Disney - who accuse him of mismanagement and are seeking his ouster.

Disney officials issued a statement yesterday promising to "carefully evaluate" the Comcast proposal, but they offered no time frame or any hint of the board's reaction.

And if Comcast is serious about a merger, analysts say, its offering price will likely have to rise. The initial offer of 0.78 of a share of Comcast stock for each share of Disney placed a value of roughly $26.47 on Disney's shares, a premium of less than 10 percent over the stock's opening price of $24.08.

Disney shares up

After the takeover bid was announced, traders on the New York Stock Exchange ran Disney shares up to a closing price of $27.60, suggesting that shareholders are expecting an improved offer.

Comcast stock, traded on the Nasdaq market, fell 8 percent yesterday to close at $31.23.

"I'm amused by the market's reaction," said Tom Burnett, head of research for Wall Street Access and its publication Merger Insight.

"It's telling us that the board is going to reject the offer and ask for a lot more - maybe a lot more than Comcast can finance. We're very early in the game on this."

News Corp. Chairman Rupert Murdoch was quoted yesterday by the British newspaper The Guardian saying that a Comcast/Disney merger would simply create a "third player" among television media giants, alongside his company and Time Warner Inc.

"I don't think it changes much," he said.

Comcast executives seemed to disagree. At a news conference yesterday, they unveiled a vision for the combined company that could ultimately change the way American households receive and pay for television programming.

Economies of size

Stephen Burke, president of Comcast Cable and a 12-year executive at Disney before he joined the Philadelphia-based cable conglomerate, said the combined companies could save $300 million to $400 million a year simply by eliminating redundancies and taking advantage of combined purchasing and bargaining power.

He also detailed Comcast's plan to revitalize Disney's fabled animation studios, combine and expand the two companies' cable television networks, spawn new networks and cross-promote them, and expand Comcast's customer base, which already exceeds 21 million cable subscribers and 5 million high-speed Internet subscribers.

Company Chief Executive Officer Brian L. Roberts said he thinks Disney's programming content, when combined with such Comcast-owned properties as the Golf Channel and the E! entertainment network, creates the first viable platform for a company to offer viewers a tailored programming package that spans the entertainment spectrum from news to sports to movies.

He said that Comcast's Video on Demand service, which today allows subscribers to order from a limited selection of movies and other programming whenever they wish, could be the model for the future of virtually all television programming.

"We believe that the way people interact with their televisions is absolutely going to change in the near future," Roberts said. "It's a competitive business, and we're trying to give consumers a choice. That's who's going to win.

"We really, bottom line, think this accelerates the digital future."

Government review

Any merger agreement would be reviewed by the Federal Communications Commission, which regulates corporate ownership of the airwaves, and possibly by the U.S. Justice Department, which is responsible for ensuring that federal antitrust laws are not violated.

FCC Chairman Michael Powell said before a U.S. Senate committee yesterday that "a merger of that magnitude will undoubtedly go through the finest filter at the commission as is possible."

Yet regulators have approved similar deals before, notably News Corp.'s recent purchase of a large stake in the satellite television provider DirecTV. The FCC imposed some restrictions on the owner of the Fox family of television networks, seeking assurances that competitors would still have access to the company's programming.

The proposed merger could face opposition from consumer groups, which have railed against the nationwide consolidation of media ownership in recent years. The Consumers Union issued a statement yesterday decrying the proposed deal as a potential blow to viewer choice and fair pricing.

"If this deal goes through, it tightens the ownership grip over the most important sources of news, information and entertainment in our country," said Gene Kimmelman, senior public policy director for Consumers Union, publisher of Consumer Reports.

"Disney has an enormous package of extremely popular, marquee programming and a national network that would now be owned by the largest cable distributor in the country, which has little to no competition in most communities. The potential impact is enormous."

Comcast executives say the merged company would keep its corporate headquarters in Philadelphia but that Disney would continue to be based out of its offices in Burbank, Calif.

Financial strength

Both companies announced their quarterly earnings yesterday and revealed that neither is approaching the possible merger from a position of weakness.

Comcast reported net income of $383 million for the fourth quarter of 2003, compared with a loss of $51 million for the quarter a year earlier. Disney posted net income of $688 million for the first quarter of its fiscal year, up from $36 million for the first quarter a year ago.

Comcast, which merged with AT&T; Broadband in 2002 to become the nation's largest cable provider, is no stranger to corporate takeovers, including hostile ones. But company executives said they will wait patiently for Disney's board to respond to their offer and have no plan to present the merger directly to shareholders.

"We want to make this as friendly and amicable as possible as soon as possible," Roberts said.



* Television: ABC broadcast television, ESPN, Disney Channel and 10 television stations.

* Movies: Walt Disney Pictures and Miramax Studios.

* Theme parks: 10 parks including Disneyland and Walt Disney World.


* Cable company: More than 21 million subscribers.

* Television: Comcast SportsNet, E! Entertainment Television, Style Network, Golf Channel, Outdoor Life Network and G4 Media.

* Sports teams: Philadelphia Flyers and 76ers, Frederick Keys, Bowie Baysox and Delmarva Shorebirds.

SOURCES: The Walt Disney Co.; Comcast Corp.; Moneyline Telerate; Associated Press, SUN STAFF

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