Disney in Playland

Let the games begin. Comcast's multibillion-dollar bid for Walt Disney Co. was likely only an opening salvo in a war for Michael Eisner's empire.

Comcast knew its audacious bid last week would lure others in. But, according to the party line, there aren't many real rival bidders.

Eisner doesn't want to be forced into a sale but has fewer defenses than most U.S. companies. One possible tactic is making Disney too expensive for cost-conscious Comcast's tastes, loading up the company with debt, or engineering a takeover of its own.

Or, with luck, Eisner can galvanize investors, convincing them that he can lead a Disney revival.

"Disney is just going to try to talk its stock up and hope we go away," said one Comcast adviser to the giant MSO.

For Eisner, the fight became a ground war at Walt Disney World, wooing investors gathered at a long-scheduled financial confab.

While Eisner and company huddled with analysts in Orlando, Comcast CEO Brian Roberts and cable division President Steve Burke took to the air. With a cadre of key lieutenants, the Comcast duo courted investors in Boston, Denver and Los Angeles—in a single whirlwind day.

Burke, a former senior Disney executive, sees the two companies at a unique crossroads. Disney's management and its stock price have been blasted by harshly critical, key investors. At the same time Comcast seems to have has successfully digested its 2002 $47 billion takeover of AT&T Broadband and is equipped to take advantage Eisner's distress.

"This is a moment in time when this deal can occur," said Burke, speaking from his plane en route from the Mile High City to L.A. "If we can do it at a sensible price, you get an outcome greater than either of the two companies would be separately."

What is a sensible price? What's the current price, for that matter? It all depends on how you count.

Comcast uses $66 billion, about 1.6 billion shares worth $32.94 each (the closing price the day before the deal was announced), plus the assumption of around $12 billion in existing Disney debt.

Various media used different criteria to came up with other values for the deal (see page 48).

Comcast's move would create an unprecedented media portfolio linking a huge stable of cable systems to a huge major broadcast network and station group, movie studio, cable networks plus world-renowned theme parks.

Rupert Murdoch's News Corp. has all of those pieces, too, after recently adding control of

DirecTV to its Fox TV and movie properties. But Comcast would have extra local juice with cable systems and TV stations in 30% of the country, including the five largest markets.

Comcast sees places where it could simply run the company better, particularly at what Burke calls "weak No. 4" network ABC and its stations. Owning cable's highest-cost basic network—ESPN—would keep the controversial sports network's high license fees largely in the family.

Roberts is also frustrated that he can't get high-quality content for startup video-on-demand services. VOD is proving a weak business largely because the studio won't give cable systems theatrical titles until they've been out on DVD a month or two, cable's conventional pay-per-view window.

To Eisner, the offer is just the latest insult. For months, he's been hammered by Roy Disney, nephew of the founder, a major shareholder, and former board member. Disney is trying to rally shareholders to oust Eisner because of the sag in the theme parks and ABC.

In Orlando, Eisner acknowledged only that the board and management would review the offer. But he was dismissive. Asked if Disney planned any acquisitions, Eisner replied instantly, "We're buying Comcast!"

But he clearly isn't as enamored of marrying content and cable as Roberts is. "I think distribution is a very good business," Eisner said. "It is not essential for a company like Disney."

In a clear reference to Comcast, he added, "I've had no problem getting quality product on the most monopolistic of platforms."

Comcast's big bet is that its move sparks an auction that will pry Disney loose but not spur a fierce bidding war that would drive up the price. Comcast executives don't see a big pool of bidders. "Who's out there?" asked one finance exec.

The last big media auction—Vivendi Universal—attracted five serious buyers. But that was a $14 billion deal, one-fifth the size of Disney. A $66 billion opening bid virtually rules out financial buyers and midsize media players.

Bill Gates is, as always, the first name to come up. The Microsoft chairman has an enormous $52 billion of cash on the company's balance sheet. Microsoft has always hovered around the media business, since video content drives so much of the computer business. But Microsoft has bought primarily conduit, not content. That's why it backs MSOs, including Comcast and the UK's TeleWest.

During the auction of AT&T three years ago, Microsoft stood ready to back either final bidder, Cox or Comcast, which ultimately won.

Among the biggest players, Time Warner would be the most natural fit. It's accustomed to managing studios and cable networks but lacks TV stations or a major broadcast network (it co-owns small net The WB with Tribune Co.).

But Time Warner CEO Richard Parsons would risk unbalancing his own turnaround from financial scandals and the slide of America Online. Even if antitrust regulators would anoint the ownership of two movie studios—Disney and Warner Bros.—the company is probably too snarled in various securities investigations over AOL's accounting practices to get a deal cleared.

"They can't even get the IPO of Time Warner Cable out the door," said Sanford Bernstein & Co. cable analyst Craig Moffett.

John Malone's Liberty Media Corp. is big enough and could certainly use a deal to give his company some direction. But Malone's stock is not a strong currency, and Liberty backed away from Vivendi Universal when the bidding picked up.

Disney has lots of options. One is toughing it out. The threat of dilution to Comcast's existing shareholders by a stock swap has socked the MSO's stock price 10%. That's typical.

One fast move for Disney would be loading the company up with debt and buying back stock. That move—being studied by Disney's investment bankers late last week—would make the company less attractive to Comcast but would likely raise Disney's stock price by shrinking the equity. The downside is burdening Disney with new interest costs.

Disney could also run out to buy assets, again making itself unattractive. Arbitrageurs' favorite prospect is DBS provider EchoStar, which is threatened by the News Corp./DirecTV combination. But Eisner's distaste for distribution other than TV stations makes that unlikely.

Comcast is expected to raise its bid. Analysts believe that, to persuade Disney's board to sell, Comcast has to offer a package worth more than $30 per share, up from the $27 valuation of its first bid of 0.78 of its Class A shares ($54 billion worth, plus the assumption of $12 billion in Disney debt.)

In a takeover, the buyer's stock price always drops, so a 10% dip in Comcast's price made its proposed stock swap worth $24 for each Disney share.

The first bid would give Disney shareholders 42% of the combined companies' equity. Credit Suisse First Boston media analyst Lara Warner believes Comcast will be willing to take that ratio up to 50% but no more. (The Roberts family's supervoting stock gives it 30% of the shareholder votes no matter what happens.) Comcast could offer cash to raise its price without using additional shares.

The bear-hug strategy can backfire. It worked wonderfully when Comcast targeted AT&T, forcing the telco to put its cable systems up for sale in 2001. When Roberts used it in 1999 against MediaOne (then the fourth-largest cable operator), Comcast started an auction but lost (to AT&T).

Roberts sees MediaOne as a good sign for his own investors and as a cautionary one for Disney board members who might want to drive the price up. "In every deal we have done, we have been a disciplined buyer, and we have been a disciplined seller, and we have walked away."