AT&T's New Gambit

Jul 25 2001

ANALYSIS Last week, AT&T and Comcast engaged in a public debate over the future of AT&T Broadband. On Wednesday, it was AOL Time Warner, reportedly talking with the telephone titan on possibly merging the two companies' cable operations.

AOL's interest in AT&T Broadband is just the latest twist in the history of a subsidiary that was supposed to save the storied telecommunications firm from failure when it bought the unit three years ago for $100 billion. So far, the investment hasn't paid off and has consumed the attention of AT&T's board, which is struggling to restructure AT&T into separate high- and slow-growth companies.

Comcast offered $44 billion for the broadband unit, an amount that AT&T's board found unacceptable. Still, the offer was tempting enough to prompt AT&T to cancel the broadband unit's planned IPO in order to explore other options. Why go through the bother and expense of a public sale if the unit can be sold in its entirety for a reasonable price?

News that AT&T is talking with AOL Time Warner about the broadband unit, first reported by the Wall Street Journal, seems to be the latest in options that the phone company is exploring. Representatives of AT&T were not available to comment on the discussions. AOL declined to comment on the rumors.

Of course, AT&T might just be using the AOL talks to goad Comcast into upping its original offer. AT&T rejected the Comcast deal because it simply did not reflect the value of the company. In a conference call after its second-quarter earnings were released Tuesday, AT&T CEO Mike Armstrong tried to outline why he thinks AT&T Broadband has great growth prospects and is a more valuable company than most outsiders, especially Comcast, assume.

While it is widely believed that AT&T has run AT&T Broadband into the ground by spending too much money to offer advanced services, such as phone service on its cable pipes, the company has recorded impressive growth. It now has 553,000 advanced service subscribers, 46 percent more than it had a year ago, and 848,000 broadband phone customers. If it can maintain some growth, there is good reason to think those services might actually start to pay off.

Any sort of sale, which seems to be AT&T's preferred approach for dealing with the broadband unit, would face a regulatory hurdle. An AT&T Broadband and Comcast combination might sneak past federal regulators. A union with AOL would face a much harder time. Both companies have already had run-ins and scrapes with regulators. Both AT&T and AOL are operating under guidelines and consent decrees from the Federal Communications Commission as to how they run their businesses. If a proposed combination of the No. 1 and No. 3 cable companies – AT&T and Comcast – required scrutiny, a proposed combination of No. 1 and No. 2 – AT&T and AOL – would likely merit much more.

In an interview with The Standard before AT&T's board turned down Comcast's offer, Comcast President Brian Roberts rejected the idea that he could sweeten his company's bid for AT&T Broadband. He did admit, however, that there was wiggle room. He said he could envision raising the bid to take into account AT&T's holdings in Time Warner Cable. That's something former AT&T board member John Malone, who also might bid for AT&T Broadband now that he is independent, had mentioned that he would like to see included in the deal.

What can AT&T hope to get out of all this maneuvering? Right now, the company can just save face by getting a deal that earns at least some sort of return on its investment. With Comcast, AOL and perhaps Malone lurking out there with possible new bids, it might yet happen.