AT&T broadband woos media giants

Tom Johnson and Jessica Hall

NEW YORK: AT&T Corp. has held preliminary talks with Walt Disney Co., Cox

Communications, Cablevision Systems, AOL Time Warner and other heavyweights,

hoping to get more for its cable business than the $37.8 billion offered by

Comcast Corp., sources close to the situation said on Wednesday.

Given the size and market strength of AT&T Broadband, the No. 1 US cable

television company, a combination with a large company like AOL Time Warner

would likely face tax and regulatory hurdles, the sources and regulatory experts

said.

But several media and cable conglomerates are hovering, talking to both

Comcast and AT&T and hoping to at least take part in the final resolution,

the sources said.

Content companies like Disney and AOL Time Warner will likely want to take

part in any AT&T Broadband deal to secure much-sought after access to

high-speed pipelines to distribute their programming, movies and music, industry

observers said. Ultimately, whoever wins the broadband bid, will own a large

amount of distribution power and, therefore, will likely be a highly

sought-after partner, observers said.

"There is a lot of focus for the potential of (Comcast/AT&T) to

drive a new round of mergers within the cable operators," said John

Freilinghuysen, vice president of the media/entertainment practice at Booz Allen

and Hamilton. "I think equally there is an opportunity for that to create

more linkages to content companies as everyone is looking at the strength of the

AOL Time Warner portfolio."

Still, any outright merger, particularly between AT&T and AOL Time

Warner, would face tough scrutiny from federal regulators. The two companies'

cable systems do not overlap, and so the deal would not directly eliminate

competition.

But regulators probably would be concerned such a massive cable concern could

gain too much leverage over television programmers, antitrust attorneys in

Washington said.

Beyond that, antitrust enforcers may also insist that AOL Time Warner and

AT&T guarantee their cable systems will remain open to outside broadband

Internet access providers, since they already control the two largest cable

broadband providers.

AT&T is also looking to avoid serious tax implications in any deal. To

avoid tax penalties, AT&T shareholders would have to control a majority of

the economic interests in the combined firm, making it difficult for a firm the

size of AOL Time Warner to buy the operation outright.

Biding its time



AT&T, therefore, ultimately may decide to proceed with its previously
announced plan to spin off AT&T Broadband as a separate company if it does

not find a deal to its liking.

"AT&T is talking to everyone. Some more so than others," a

source familiar with the situation said. Another source confirmed AT&T's

discussions with AOL Time Warner, first reported in The Wall Street Journal

Wednesday, but said the talks were preliminary and designed merely to feel out

both sides on a number of options.

AT&T has also talked with Disney, Cox, Cablevision, Charter

Communications Inc. and "there's a few others out there," a source

said.

Comcast, which is controlled by company founder Ralph Roberts and his son

Brian, has also held talks with many of the same companies, including AOL Time

Warner, about the possibility of divvying up parts of the business to avoid

antitrust objections to a combination between AT&T Broadband and Comcast,

sources said.

"The Roberts family has excellent longtime relationships with many of

the companies in this industry and there's been preliminary discussions with

some of them," a source said.

A Disney spokeswoman declined to comment on the company's possible

involvement in a bid for AT&T Broadband, referring instead to comments made

by Disney President Bob Iger Monday on financial news channel CNBC. Iger said

his company had been approached by "a number of entities that have sought

our help or involvement in terms of putting together a bid of sorts for those

assets," according to CNBC transcripts.

AT&T and Comcast both declined to comment, as did spokespersons for AOL

Time Warner, Cablevision and Charter. Cox did not immediately return calls

seeking comment.

Open ballgame

Word of the discussions come just one week after AT&T rejected Comcast's

unsolicited takeover offer for its broadband unit - originally valued at $40

billion in stock plus the assumption of $13.5 billion in debt - in a bid to

create the nation's largest cable concern with 22 million subscribers.

AT&T shares have essentially held steady since then, but climbed 71

cents, or 3.7 per cent to close at $20.15 Wednesday on renewed optimism the

company might attract a higher bid. There still has been no direct contact

between AT&T and Comcast since the rejection, sources on both sides

confirmed. But that could change rapidly if Disney or another company becomes a

serious bidder.

The exact nature of the AT&T and Disney talks could not be learned, but

Disney President Robert Iger and AT&T Chairman Michael Armstrong are

scheduled to depart on an Alaskan salmon fishing trip together in the coming

days, sources said.

AT&T has been in endless talks to sell its stake in the Time Warner

Entertainment joint venture to partner AOL Time Warner, but the two sides have

failed to agree on a price. AOL may be interested in talking with AT&T to

make sure any deal they do gives AOL Time Warner the rest of TWE, and possibly

open-access on a combined AT&T/Comcast network, sources said.

"Think about what AOL wants: it wants access to as many cable systems as

possible. Could they be talking to both AT&T and Comcast just to make sure

they get a deal out of this that they like? Probably," an industry source

said.

Sanford Bernstein analyst Tom Wolzien said that, for AOL, there would be some

merit for the company to join forces with Comcast, pick up the TWE stake and, as

part of that, assure its content gets carried on Comcast.

They could also perhaps enter into a long-term deal on the programming side

and not cable ownership side, Wolzien said, in a pact similar to Viacom and Time

Warner's for Comedy Central. Through such a deal, they would have the reach of

about 33 million households.

(C) Reuters Limited 2001.