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Winners lose and losers win
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December 20, 2001: 4:12 p.m. ET
AT&T is now a takeover target, AOL seen making bid for Cox
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NEW YORK (CNN/Money) - AOL Time Warner and Cox Communications may have lost the bidding war for AT&T Corp.'s cable-television business, but some of their stocks surged Thursday while shares of winner Comcast Corp. dropped sharply.
Comcast won the five-month battle for AT&T's cable unit, agreeing to pay $47 billion. The deal makes a winner out of Comcast, the nation's No. 3 cable operator, which will emerge as the clear market leader, with 22 million customers in 41 states.
AT&T Corp. initially rejected Comcast in July when the Philadelphia-based cable company bid $44.5 billion. AT&T, the nation's largest long distance phone company, backtracked when Comcast sweetened the deal and gave embattled AT&T CEO Michael Armstrong a position in the combined firm.
The transaction also cuts AT&T's debt by more than $20 billion.
Unlike the AOL bid, which would have combined the top two cable companies in the U.S., a Comcast-AT&T Broadband is not expected to encounter many regulatory hurdles, said analyst David Joyce, of Guzman & Co.
"Comcast doesn't have the vast array of content that AOL has," Joyce said. "But [the merger] may call for the sale of particular cable systems." But any divestiture would not be significant, he said.
Shares of Comcast (CMCSK: down $2.28 to $35.79, Research, Estimates) dropped more than 6 percent in afternoon trading while the stock of AT&T Corp. (T: up $1.05 to $17.85, Research, Estimates) rose nearly 6 percent. AOL Time Warner, the No. 2 cable company in the United States, dropped nominally while Cox surged more than 4 percent.
AOL, parent of CNN/Money, had hoped to snare AT&T's cable unit as a strong complement to its existing infrastructure. With Comcast gaining AT&T Broadband, AOL falls to a more distant second with Charter Communications placing third and Cox now in fourth.
Jefferies & Co. on Thursday cut its rating on Comcast to "accumulate" from "buy" and its price target to $40 from $44, citing dilution of the company's cash flow trading valuation and the possibility of lingering uncertainty about how much AT&T Broadband will affect profit margins.
At the same time, Jefferies raised its rating on Cox Communications (COX: up $1.61 to $40.00, Research, Estimates), one of the losing bidders, to "accumulate" from "hold." Even though it may have lost the bidding war, the firm said investors are likely to credit Cox for having a more attractive valuation and more certain future cash flow.
What's next for AOL, AT&T?
AT&T is now a takeover target with SBC Communications Inc. and Bell South as the most likely candidates to buy its remaining units, analysts said.
AT&T plans to create a tracking stock of its consumer long-distance unit in mid-2002. The segment is expected to produce $10.5 billion revenue in 2002 and $3.39 billion cash flow, said analyst Drake Johnstone of Davenport & Co.
AT&T's business segment, which offers communication services to companies, is anticipated to have $26.8 billion revenue and $7.6 billion cash flow.
Excluding $18 billion in debt, a sale of AT&T's leftover units could be valued at $30.5 billion, or around $9 a share, Johnstone said.
"It's a natural progression for Bell South or SBC (SBC: up $0.37 to $39.75, Research, Estimates) to swallow the remaining pieces of AT&T," a trader said.
Some also see AOL making a bid for Cox Communications in a defensive play against Microsoft.
Microsoft (MSFT: down $2.73 to $66.76, Research, Estimates) provided financial assistance to both Comcast and Cox in their bid for AT&T Broadband to prevent AOL from acquiring the unit.
Microsoft, which already owns a 10 percent stake in Comcast, now gets its most direct link into millions of homes. Companies like AT&T, Comcast and Microsoft are eager to offer not only cable TV service over the cable lines, but Internet access, services like interactive television and in some areas traditional telephone service.
"Our support is consistent with our long-term commitment to advancing broadband deployment and software services," a Microsoft spokesman said Thursday.
Check cable operator stocks here
A takeover of Cox could see AOL paying about $55 to $60 a share. "An AOL counter-bid is not out of the question," Johnstone said. "The nice thing about a Cox deal is that it would be part of AOL and part of its revenue and cash flow ."
AOL in its losing bid for AT&T Broadband had pitched spinning out its own cable business and combining it with AT&T's. "It's looks like they are open to just about everything," a trader said.
But the world's largest media concern could also try to top Comcast's bid for AT&T Broadband. "A bidding war could arise," said analyst Pat Comack of Guzman & Co.
Perhaps one of the most unlikely winners to emerge from the bidding war is AT&T CEO Michael Armstrong. He was expected to retire in May 2003, but now will serve as chairman of the new company when the merger closes at the end of 2002.
Under his stewardship, AT&T paid about $106 billion in the late 1990s for the cable businesses Comcast has agreed to buy for less than half that amount. It was supposed to be a new direction for AT&T, which will now have only its shrinking consumer and business long-distance telephone and data operations left.
During the bidding war, many industry analysts and some investors had doubted that Comcast would win after key executives had harshly criticized AT&T's management. 
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