Mediaone Voting On Bids By Today

Television Digest with Consumer Electronics, May 3, 1999

MediaOne Group board was expected to choose by today (Mon.) between bids for company submitted by AT&T and Comcast-led group, sources said. We're told board was to meet Sat. (May 1), with vote some time over weekend. Board was considering AT&T's $58-billion offer, but we received confirmation that board was in discussions with Comcast on bringing in America Online (AOL) and Microsoft as possible partners in counterbid. Details of Comcast counterbid weren't available, but MediaOne confirmed it had entered confidentiality agreements with AOL and Microsoft to share information about its merger agreement with Comcast. Comcast will receive $1.5 billion penalty if MediaOne chooses AT&T, but AT&T could challenge legality of penalty clause.

Industry analysts agreed that Comcast didn't have cash to match AT&T's bid, and Roberts family was considered to be reluctant to surrender control of closely held company. Thus, we're told, only way to match or surpass AT&T's bid was with outside partner.

House Telecom Subcommittee Chmn. Tauzin (R-La.) is "deeply troubled and concerned" by AT&T bid for MediaOne Group, spokesman Ken Johnson said, and if chmn. decides he's not satisfied with merger "he may ask federal regulators to block it." Johnson said Tauzin viewed AT&T's acquisition of TCI as means of fostering competition in local telephony, but MediaOne bid gives him "deep and grave concerns about the impact on competition" in video. While Tauzin hasn't made decision, Johnson said, he's likely to ask regulators "to take a long, hard look at that merger and possibly prevent it from happening."

AOL would be returning to infrastructure ownership by partnering. It wouldn't comment on speculation. AOL sold off its Internet infrastructure 2 years ago to what is now MCI WorldCom in exchange for CompuServe in focus on content provision, but analysts say AOL now feels strong need to gain presence in broadband. Internet strategist Bill Whyman of Legg Mason said ownership of MediaOne would be "tactical shift" for AOL but would target same goal -- broadband access. He quoted Excite CEO George Bell as saying 66% of AOL customers drop service after joining AtHome: "That's why [AOL's] so concerned about [broadband]."

AOL would be offering stock in deal, said Bruce Leichtman of Yankee Group: "They don't have cash." AOL's "stock valuation is skyrocketing," he said, "but you can put all the stocks in the world [and it's better] to have a bird in the hand," as in AT&T's $30 billion in cash. He said Amos (Bud) Hostetter, founder of MediaOne predecessor Continental and MediaOne's largest shareholder, would never agree to stock deal when AT&T's is on table.

AOL has been most prominent proponent of opening cable plants to competing ISPs. Its OpenNet partners were noncommittal on impact AOL's ownership of cable plant would have on coalition. "We don't think [AOL would] participate in the monopolistic practices [of MSOs]. They understand the importance of unfettered access to broadband infrastructure," Mindspring spokesman said. Asked whether ISP was confident AOL would negotiate reasonable access, spokesman said: "I wouldn't say that." "It would be very interesting to see if when Mindspring or Earthlink said to AOL, 'We'd like access to your plant,' would AOL be forced to agree or come up with reasons why [open access] didn't hold."

Microsoft owns 10% of nonvoting stock in Comcast through $1.1 billion investment 2 years ago, and is 12.5% owner of Road Runner with Advance/Newhouse, Compaq, MediaOne, Time Warner. Microsoft hasn't commented on its plans. Leichtman said MediaOne was "lose-lose" for Microsoft: "If they bid and win, they don't get AT&T's business. If they bid and lose, they don't get AT&T's business."

Complicating possible partnership with Comcast is question of who would be in control. Hostetter torpedoed Comcast's bid because it would have given Roberts family 80% control with less than 2% of shares. Gartner Group analyst Patti Reali said "Comcast would have to accept less control" in partnership with Microsoft or AOL. "All of this comes down to how they cut up the pie," Whyman said.

Legality of termination fee is unclear. We're told Comcast wanted amount to be much higher, but MediaOne was concerned that larger payment wouldn't survive court scrutiny. Hostetter told MediaOne board existing fee isn't legally viable. He's largest MediaOne shareholder, with about 56 million shares (9.3% of stock). In March 25 letter in which he sought board's approval to recruit new bidder, Hostetter wrote that $1.5 billion termination fee "might have been sustainable as a postauction measure if needed to preserve maximized value, but they are entirely inappropriate as preauction measures..." He said Del. Supreme Court rulings suggest that "once you [board] took steps to sell control of MediaOne and to protect that sale rather than to maximize value for shareholders, all defensive measures became moot." On March 31, MediaOne board gave Hostetter permission to pursue another bidder but didn't address his challenge to termination fee.