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Comcast waiting game is expected


Comcast has repeatedly indicated in talks with investors over the past two days that it has no plans to sweeten its offer for Walt Disney Co., and many of them seem certain that the company is playing a waiting game.

Comcast's bid was worth $23.90 a share yesterday, or about $50 billion. Shares of Disney continued to run far ahead of the offer price, closing yesterday at $26.90, but Comcast is betting that Disney's stock will fall below the bid price as time passes and no new bidder emerges.

Among the most likely candidates to consider competing bids, Viacom has told investors and analysts that it is not interested, and Time Warner, just coming out of its ill-fated merger with America Online, seems unlikely to take on another big merger.

Yesterday, it looked as if Comcast's patience could pay off. Disney's shares fell 2 cents while Comcast rose 85 cents, to $30.75.

But if the gap does not close significantly, Comcast might bid more, analysts said.

They added quickly, however, that Comcast would be disciplined in not offering more than one share of its stock for each share of Disney because any higher offer would leave Comcast with less than 50 percent of the combined company. Its current offer is for 0.78 of a share of Comcast for each Disney share.

"I think Comcast will have to come up with another offer," which could include a cash component, said Dennis Leibowitz, who heads Act II Partners, a hedge fund that specializes in media companies. ''But I believe they'll try to increase the bid with cash because of the potential dilution in issuing shares, which would worry their shareholders. And cash would assure Disney shareholders of an acceptable value regardless of the share price of Comcast stock."

Some want cash

Some Disney shareholders say any offer will have to include some cash. Comcast has indicated that it will generate about $2 billion of free cash flow this year, but that follows years of investing its cash in cable. Free cash flow provides money for companies to pay dividends, buy back shares and make strategic investments for cash.

"Disney had $1.8 billion of free cash flow last year," said Bob Olstein, manager of Olstein Financial Alert Fund, whose funds own 1 million shares of Disney. "Comcast does not have the same record."

Although Comcast has said privately that it has no plans to add cash to any offer, analysts note that it could probably put up as much as $8 billion by borrowing money or selling assets. Among other holdings, it has $1 billion in shares of Liberty Media and stakes in Time Warner Cable and Time Warner, although those interests are not as liquid as the Liberty Media holding.

Outcome uncertain

But for now, the outcome of Comcast's overture is uncertain. It is not unusual for the price of a target company's stock to surpass the bid price.

Peter Schoenfeld, who heads the hedge fund P. Schoenfeld Asset Management, noted that PeopleSoft traded at a premium to the bid from Oracle. Oracle has since raised its offer, although the deal is caught up in antitrust issues.

Premium wiped out

And he noted that TRW's stock ran ahead of Northrop Grumman's bid for that company, forcing Northrop to raise its offer several times before the deal closed.

"It is common for the stock price of the target company to trade over the offer," Schoenfeld said. "What is uncommon in the Comcast bid is that the 9 percent premium offered was so low and was wiped out so quickly."

There have been cases in which the premium of a deal was not much larger than that in Comcast's offer for Disney. J.P. Morgan's bid for Bank One offered a premium with a percentage in the low teens, but J.P. Morgan stock held up because Wall Street liked the deal.

But one hedge fund manager who spoke on the condition of anonymity noted that Comcast has failed to convince investors that it could run Disney much more successfully than its current chief executive, Michael D. Eisner, does.

Possible miscalculation

Several media industry executives think Comcast might have miscalculated in offering a relatively small premium.

"Comcast may not have figured that its investors would get so concerned so fast that Comcast might end up overpaying," one longtime media expert said. And a top-level media executive, who spoke on condition of anonymity, said he thinks Comcast was late in making a bid for Disney.

"Disney can now argue that it is getting straightened out, that its earnings are up and its stock is up. And besides, people still believe there may be another offer."

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