More than anything else, this whole
Comcast thing is a period of questioning for most of us. The world of high finance,
corporate politics, mergers and acquisitions is generally foreign. I’ve seen a
lot of questions asked on our own message boards and by others who know I follow
Disney pretty closely.
So, rather than try to turn this section into
a regular article, I am just going to present it in a question-and-answer format,
covering everything I can think of and also presenting some questions to which
I don’t begin to know the answer. If you have any questions of your own, or want
to correct or expand on anything I say, please send me an
e-mail, and we’ll include them in a follow-up article or mailbag.
Q.
Who is Comcast?
A. From the company’s own blurb:
“Comcast Corporation (www.comcast.com) is principally involved in the
development, management and operation of broadband cable networks, and programming
content. The Company is the largest cable company in the United States, serving
more than 21 million cable subscribers. The Company’s content businesses include
majority ownership of Comcast-Spectacor, Comcast SportsNet, E! Entertainment Television,
Style, The Golf Channel, Outdoor Life Network and G4.”
Reading
that, it is kind of hard to believe that Comcast is bigger than Disney. After
all, Disney has a load of networks, too! Plus a pretty good sized film and television
library, four theme parks, a pretty successful cruise, a hockey team, and a publishing
company, among other things.
But it turns out that being the nation’s largest
cable company will really get you somewhere. Think about your cable bill. Think
about 21 million other people with the same cable bill, or higher if they’re paying
for all the HBOs and Showtimes and the occasional pay-per-view. And then start
thinking about the people using cable for broadband Internet access. It quickly
turns into a pretty good stream of money.
One of the key emotional attachments
for Disney fans is the company’s rich history. If Disney should become part of
Comcast, here is an overview of the new history to be learned and cherished:
Comcast
started in 1963 as American Cable Systems when founders Daniel Aaron, Ralph Roberts,
and Julian Brodsky purchased a small Tupelo, Mississippi, cable system. By 1969,
they’d grown into their current headquarters (Philadelphia) and name.
Since
1969, they’ve taken good advantage in the growth of cable, but have mostly grown
through key acquisitions and golden divestitures. Comcast purchased smaller cable
companies all over the country and got in early on Barry Diller’s QVC shopping
network. Eventually, Comcast gained controlling interest in QVC, and it was a
cash cow until they sold it in September 2003 for almost $8 billion.
Comcast
became the nation’s largest cable operator in 2002 when it completed a takeover
of faltering AT&T Broadband for about $48 billion.
In addition to cable operations and networks, a subsidiary (Comcast-Spectacor)
owns controlling interest in the Philadelphia 76ers basketball team, the
Philadelphia Flyers hockey team (as well as the arenas in which they play),
the AHL minor-league Philadelphia Phantoms hockey team, three minor league
baseball teams, and a number of arenas and theaters around the country.
Q.
What is a “hostile takeover” and how does one work?
A.
The key thing to remember here is that Michael Eisner and the Walt Disney Company
board of directors do not actually own the company. The company is publicly owned
by the thousands of individual shareholders who own Disney stock, and they’ve
selected Michael Eisner and the board to look out for the best interests of the
shareholders.
According to Comcast’s letter
to Disney, Brian Roberts, Comcast CEO, approached Michael Eisner earlier
this week about discussing a possible merger.
As an analogy, let’s say
you own a second house and have a financial manager handle it for you. A neighbor
wants to buy the house, and he approaches your financial manager, who sends him
packing, telling you that it doesn’t make any sense to sell the house at this
time to that person.
That’s essentially what Eisner has done. He (the financial
manager) has told the owner of the house (the shareholders) that selling to Comcast
(the neighbor) isn’t a good idea. End of story, no sale!
Actually, no. While
the financial advisor can make recommendations, he doesn’t actually have final
authority to say no. The owner does, and can overrule the financial manager.
And that is just what Comcast is going to do. If it can’t convince Eisner
and the board that the company should be sold, Comcast is going to go
directly to the shareholders and ask them if they are willing to sell.
That’s the “hostile” part of a hostile takeover—it happens
against the recommendation of management.
One way this can be done is to simply buy all the shares in the company
(or, a majority of the shares). In any publicly traded company, individual shares
are trading hands all day long, keeping those people busy on the floor of the
New York Stock Exchange. If somebody wanted to, they could just patiently buy
shares as they became available for sale until they owned a majority. Since a
majority would be able to pass any shareholder resolution, they could then sell
the company to themselves.
If you look back over history, you can see this
in 1983 when Disney was last going through something similar. Sensing that the
company was weak, several investors purchased very large portions of Disney with
the intent of either being paid off to leave the company alone or eventually capturing
a controlling interest and breaking the company into pieces for a huge profit.
Fortunately for Disney fans, this was avoided in a series of maneuvers that culminated
in Michael Eisner and Frank Wells taking lead of the company.
But Disney
is much bigger now, and it just isn’t feasible for one company to buy enough shares
on the open market to take control of Disney. As they gained more shares and available
shares became scarcer, it would just drive the price up and up.
So, instead,
they’re going to make an offer and try to get every Disney shareholder to sell
their shares for a predetermined price. The price that Comcast offered Wednesday
morning put the total value of all Disney shares at about $66 billion (minus around
$11 billion in debt).
Not many companies have that kind of cash lying around,
so they aren’t actually offering you $10 for your $10 of Disney stock. Rather,
they are going to offer shareholders $10 of Comcast stock for $10 of Disney stock.
But
who would accept that? If the shareholders preferred $10 of Comcast stock, they’d
already have it instead of their $10 in Disney. So Comcast has to sweeten the
deal. The first thing they do is offer a “premium.” Specifically to
this deal, they offered $11 of Comcast stock for every $10 of Disney stock.
So
right out of the gate, Disney shareholders would be up 10 percent. Not a bad return
for checking “yes” on a form. But still, 10 percent isn’t all that much
(for example, in the very messy attempt by Oracle to take over PeopleSoft, Oracle
is currently offering a 20 percent premium). So Comcast has to not only offer
immediate profit for investors with that interest, but also promise improved long-term
growth for the long-term investors.
While Comcast will offer money as an
incentive, the brunt of its push to Disney shareholders will be arguing that more
money is to be made by a Disney-Comcast hybrid than by Disney and Comcast separately.
If
Comcast makes that case and 51 percent of shareholders agree, then the “hostile
takeover” will be completed.
So, while the common perception is that
a hostile takeover forces a company to sell itself, that isn’t quite true. Even
in a hostile takeover, the true owners of the company have to be convinced to
sell (though over the objections of management).
Q. Why now?
A. There are likely many reasons for the timing. The takeover
of AT&T Broadband has been completed and most of the wrinkles have been
worked out by now. The sale of QVC has loaded its coffers. Also, Comcast
can look to the previous examples of other mega-media mergers in recent
years such as AOL/Time-Warner and News Corp./DirecTV to help guide it.
From the Disney side, Comcast has many
reasons to see a buying opportunity right now. Disney management is under attack,
and selling could provide them with a way out as well as new positions on the
Comcast board of directors (in addition to sweetening the deal for shareholders,
there are things that can be done to sweeten the deal for management).
If
Comcast feels that current management has been underperforming with such assets
as the ABC television network, it may feel there is plenty of investment return
to be found simply by replacing that management.
Jim Hill had some interesting comments on his JimHillMedia.com Web site
yesterday about the “coincidence” of Disney’s annual shareholder
meeting being in Philadelphia next month. While I don’t know if I buy
the idea that Eisner has something going that would secure his legacy
for creating the world’s largest media company, the timing of this announcement
right before will surely give the shareholders an opportunity to express
their feelings about the offer.
However, hostile takeovers are rarely
a quick event and it is very unlikely that anything would be concluded by that
time. If, however, Eisner and the board are going to approve the offer, it would
be a good opportunity to sell Comcast to the Disney shareholders.
Q. What’s
in this for Comcast?
A. Content. Content. Content.
Many people
don’t realize it, but cable companies don’t get their channels for free. You might
think a network would say something like, “Hey, we have something we want
to show, you have a way of showing it, why don’t we split the income from commercials?”
It
doesn’t work that way. As an example of this, see the ongoing feud between Cox
Cable and Disney over the cost of just one channel: ESPN.
According to numbers
posted by Cox at their MakeThemPlayFair Web site (link),
they pay $2.61 per subscriber per month. Assuming Comcast pays the same rate and
has 21 million subscribers, that would mean that every month, Comcast has to pay
Disney $54.8 million just to distribute ESPN (this doesn’t include all the other
Disney owned cable channels, but ESPN is the most expensive).
To offset
that cost, Comcast gets to sell two minutes of advertising per hour. If Comcast
owns ESPN, it doesn’t have to pay the $54.8 million—and it gets to sell all
of the advertising for its own subscribers. Additionally, Comcast essentially
get a piece of every non-Comcast cable and satellite subscriber in the United
States and beyond. Comcast (a cable company) will charge Cox Cable (another cable
company) $2.61 per subscriber, and get 80 percent of the advertising revenue from
ESPN appearing before Cox Cable subscribers.
If those at Cox Cable aren’t
happy negotiating with Disney over the price of ESPN, I’m guessing they’ll really
dread negotiating with Comcast.
The networks owned by Disney really are
the draw for Comcast. The movies are a nice bonus as they’ll provide content for
the networks Comcast would own.
Q. What’s in it for Disney?
A. Synergy and distribution. Owning the content is good for the
distributor. Owning the distribution is also good for the content provider.
In a merger with
Comcast, Disney assets would gain sweetheart access to 21 million subscribers.
Guaranteed placement of the lesser cable networks (and as part of the more lucrative
basic cable packages). There are simply many advantages to be had when you don’t
have to compete with the other content providers for the attention of a distributor.
Synergy
is always a difficult thing to assess. Even when it seems obvious it can be very
difficult to pull off. There are large parts of the Disney package where you have
to wonder if Comcast would really be interested in them.
What do the people
of Comcast know about running a major broadcast network, the largest amusement
park in the world and a cruise line? This uncertainty leads some to wonder if
all Comcast really wants are the networks and eventually the other pieces would
be spun off or sold. I certainly don’t know.
However, if they are retained,
there are several obvious synergies for promoting these fringe elements (to think
that Disneyland might be fringe!). You could certainly bet that the PGA events
held at Walt Disney World courses would get great play on the Golf Channel.
Essentially,
the entire Disney company would be given greater advertising access to over 21
million homes. Comcast will certainly have a lot of explaining to do in this area
before shareholders or the board can be sold on an offer. It is interesting to
note that in its official term sheet, Comcast barely mentions the theme parks
and completely skips over the Mighty Ducks, Disney Cruise Line, or the Disney
Vacation Club properties.
It should be kept in mind, though, that at least initially it appears
that the Eisner’s answer to this question, “What’s in it for Disney?”
is “not enough.”
Q. What can Disney do to fend off a hostile
takeover?
A. There are various things that can be done to avoid
a hostile takeover.
Going back to the 1983 troubles, when Disney saw that certain investors
were stockpiling shares for an eventual power grab, they didn’t do anything
particularly subtle to avoid the threat. They paid a lot of cash and bought
the shares back from those investors. This is called “greenmail.”
The raider says, “Pay me off, or I’ll dismantle you.”
But that isn’t going to be an option this time, since Comcast isn’t buying
shares.
One common anti-takeover maneuver is the so-called “poison pill.”
This is a section of a company’s bylaws that has no business reason to
exist other than making a hostile takeover more difficult. Without going
into too many details, such poison pills increase the number of outstanding
shares, both diluting the value of any one share and increasing the cost
of acquisition.
This option isn’t available to Disney, however.
While there used to be a poison pill in the corporate bylaws, this was allowed
to lapse several years ago. If Disney management wants to resist a takeover, they’re
going to have to find other ways.
Disney could make itself financially less
desirable. I don’t know enough to suggest ways this could happen, but looking
to the Oracle/PeopleSoft battle might provide an insight. In response to Oracle’s
hostile bid, PeopleSoft ran out and bought another company itself. The hope was
that PeopleSoft could make itself too big for Oracle to buy. I personally have
one friend at PeopleSoft waiting on the edge of his seat to know if that’ll happen.
Another
thing Disney could do would be to try to set up anti-trust problems down the road.
Unfortunately, it isn’t clear just what would trigger such a response… Perhaps
if Disney could buy into a different distribution system such as satellite.
Finally,
if Comcast is really most after the cable networks (particularly ESPN), then to
prevent a total takeover, Disney could either try selling those most desired assets
to Comcast or someone else.
Q. Can I go to bed now?
A. I’m
going to whether I should or not. This column has become much longer than I planned
when I started. We’re going to run it in two parts, and I will include good responses
to this part in the next part. Additional questions I want to discuss include:
- “What history do Disney and Comcast have together?”
- “How
does all this affect the anti-Eisner campaign being waged by Roy Disney and Stan
Gold?”
- “Does this affect the Pixar relationship?”
- “What
are the regulatory approvals required and will there be any snags?”
- …and
most important, “Which hockey team will be sold: the Mighty Ducks or the
Flyers?”
So, until the next installment, thanks for reading—and hope this
helps.
