• by Paul Gough , February 12, 2004

It's a storyline worthy of a feature-length production from one of the Magic Kingdom's studios, though it may be more apt for its edgy Dimension Films unit, not the G-rated tone of Disney itself.

The plot, in fact, is one of corporate America's oldest: High-flying company sees opportunity to merge with a legendary firm with classic assets, but which has seen better days. The legend's top executive, preoccupied by internal struggles and focused on fixing troubled business operations, rebuffs the offer. Spurned company decides to take the next step, going public with a surprise offer and appealing directly to the board and ultimately, the shareholders.

As protagonists go, this story arc contains some of the media industry's best and brightest, and possibly even its bravest. One is a brand loved worldwide, built on, of all things, a cartoon mouse, that now owns theme parks, movie studios, a broadcast network, and several top-rated cable channels. The suitor is a company half its age--a firm that grew from a sleepy, 1,200-subscriber cable operator 40 years ago to become a leader in cable and broadband delivery today. One of its top players spent more than a decade at the takeover target, and knows how to fit the two companies together.

But instead of appearing on a screen at a theater near you, this drama will be played out in boardrooms on both coasts. And what's at stake is the very future of Walt Disney Co. and Comcast Corp. Comcast's assets include the nation's largest cable and broadband company along with E! Entertainment Television, G4, and The Golf Channel. Disney's portfolio needs little explanation, comprising the top movie studio, well-known theme parks, the ABC broadcast network, and cable channels like Disney Channel and ESPN.

Comcast made a big bet on the future of television and broadband when it launched a $54 billion play for Disney. If successful--and there's still no telling what could happen--the deal would catapult Comcast and Disney to a rank unequaled in the media industry: A powerhouse in both content production and television and broadband delivery.

"This combination would create one of the world's premiere entertainment and distribution companies, and attempt to restore the Disney brand name to its prominence, and the Disney Co. to growth through the marriage of content and distribution," Brian L. Roberts, president and chief executive officer of Comcast, told reporters at a news conference Wednesday in New York City. "This is an incredibly compelling combination."

A combination that at first blush, wasn't welcomed by Disney management. Disney CEO Michael Eisner rebuffed Roberts when the Comcast chief pitched Eisner on Monday. Comcast felt so strongly about the deal that it decided to go ahead anyway in what could become a bitter struggle for a company already wracked by internal divisions after a handful of directors stormed out over Eisner's direction for Disney.

"Let Me Get One Thing Out of the Way"

Comcast's announcement of the takeover bid came at an interesting time for both companies, which ironically had announced quarterly earnings within hours of each other Wednesday morning. Comcast struck first, releasing its report and then following it with an announcement of the takeover bid. Disney's first quarter earnings report had been scheduled for weeks, but it was followed later in the morning by its first reaction to Comcast's decision to make the bid public. Disney didn't appear willing to immediately engage Comcast in a public war of words. In a terse statement released Wednesday morning, Disney said it would carefully evaluate the "unsolicited" proposal.

Wednesday was also the opening of a two-day conference at Walt Disney World in Orlando, Fla., where the company planned to wine and dine institutional investors and analysts in an event designed to showcase Walt Disney's efforts to return to fiscal health. In front of a lunchtime audience in Orlando, Eisner wasn't chatty about Comcast's unwelcome bid.

"Let me get one thing out of the way," he told the crowd before continuing with the program. Eisner said that Disney's board of directors would take the Comcast offer under advisement and respond at a later date. He moved on to Disney's presumably Comcast-less future.

"We're on the road to recovery. We're doing well," Eisner said. "You saw a very aggressive, positive earnings for this last quarter, a very strong commitment to the future ... We're excited about the company. We love being a content company. We've been a content company for many years, and we think if content is not king, it's king and queen."

Then, with no further words at lunch, Eisner turned the rostrum over to the head of Walt Disney World to discuss improvements at the theme park.

A few hours later, when Disney executives convened to discuss quarterly earnings, Eisner added only slightly more information.

"Let me first get this one thing out of the way as to the unsolicited offer that we received today," he said. "Our board met this morning, and asked management and the company's advisers to provide an in-depth analysis of the proposal to enable the board to respond properly."

Then he and the rest of the executives continued with the presentation, with no mention of Comcast or the takeover bid.

"Better Together Than They Are Apart"

It was an entirely different mood at Comcast, which answered analysts' questions during its quarterly earnings call Wednesday morning and then, a few hours later, in a 45-minute news conference at a midtown Manhattan hotel.

"There's no doubt in my mind that the two companies are better together than they are apart," Roberts said.

Under details of the offer released Wednesday morning, Comcast would merge the companies in a tax-free stock swap worth about $54 billion for Disney (and assumption of $11.9 billion of Disney's debt). That's about 14 times Disney's earnings before income tax and depreciation/amortization, or EBITDA. No cash is involved at this stage. Disney shareholders would receive 0.78 of a share of Comcast stock for every share in Disney, and receive full privileges in the new company. Several Disney directors would be invited to join Comcast's board, according to a letter written by Roberts to Eisner and Disney's board.

At the consummation of the deal, Disney's shareholders would own about 42 percent of the combined Disney-Comcast.

Comcast executives, including former Disney executive Steve Burke, outlined what they believed were Disney's weaknesses, and how the merger would bring both to new heights.

"Obviously, the brands are legendary, with Walt Disney and what they've created," Roberts said. "We're very respectful and mindful of the brand and the institution that Disney has created."

Nearly Billion Dollars in Benefit Over Three Years

In presentations to investors and reporters, Burke said Comcast would have two priorities following a merger. The first would be to restore Disney to its previous level of operating results, including moving fourth-place ABC closer to the revenue levels of its competitors. That could bring $300 million to $500 million to ABC within three years, given that Burke said CBS, NBC, and Fox take in between $800 million and $1.3 billion a year each.

"If we get halfway to be the number three network, that would improve the profitability of the combined entity by half a billion," Burke said.

Similar gains--between $200 million and $300 million--could be made by improving the performance at Disney's cable channels. Burke said the channels were great properties, but that some of them--such as ABC Family--were by Comcast's estimations "not making money or is making very little money." Comcast, the nation's leading cable operator, could play a role in gaining more subscribers for Disney's cable channels.

"We think we can be helpful in getting more distribution, most clearly on our cable systems, but also distribution from throughout the company," Burke said.

The second priority would be to consolidate some operations, which Comcast executives said would probably take more from some Disney employees than Comcast. Comcast believed savings could total between $300 million and $400 million in three years. Few details were available, but the cuts apparently wouldn't target ABC, ESPN, and Disney's theme parks and animation studios, where there's little overlap between properties.

"This would not affect the vast majority of their employees, or ours," Burke said.

Burke also indicated that Disney's two traditional businesses, animation and theme parks, are in need of creative renewal. Burke, the former Disney executive, was particularly critical of its animation business, which he said hasn't been the same since "Aladdin" and "The Lion King" in the early to mid-1990s. Disney's animation efforts lost a key partner when it recently failed to reach a renewal with Pixar Studios, which created megahits like "Toy Story" and "Finding Nemo."

Burke said that animation drove Disney, in the theme parks and in consumer goods.

"The Disney animation business is absolutely central to what the Disney Co. is all about," he said.

New Plans For Combined Company

Roberts and Burke also outlined the types of initiatives a Comcast-Disney operation could accomplish in the future. Top of the list: Creating new cable channels, an area where Comcast prides itself on experience. It helped launch shopping channel QVC in 1986, and has created or acquired other networks--The Golf Channel, Outdoor Life Network, G4, a regional sports network--ever since. Earlier this year, Comcast and Radio One launched TV One, an African-American channel. And for a while, Comcast and Disney partnered in E! Entertainment Television.

"We think by uniting all of those great brands and programming with our distribution ... we ought to have the ability to create new cable channels," Burke said.

Roberts also pointed to the technological advances that Comcast was helping to pioneer, including video on demand and the digital video recorder. He said that the viewer was demanding more choice and control of television, wanting access to video on their schedules. He said that Comcast was well-positioned for that future, and that the addition of Disney's content would make it even better.

Another prime position is Comcast's broadband capabilities, including streaming video subscription packages, and content that Disney, ABC, and ESPN, among others, provide.

"We think it [the merger] accelerates the digital future," Roberts said.

Analysts Surprised To Varying Degrees

In a report released a few hours after the bid was announced, Credit Suisse First Boston analyst William B. Drewry said it wasn't so surprising, except for the fact that it happened only 18 months after Comcast had swallowed AT&T Broadband.

"The potential synergy and powerful market position of the combination makes absolute sense," Drewry wrote. "However, the initial offer is too low, and potentially by a significant margin."

That seemed to be the reaction of investors, who boosted Walt Disney's stock price $3.52 to $27.60 on heavy trading of 70 million shares on the New York Stock Exchange. But Comcast's shares dropped $2.70 to $31.23 on the Nasdaq market.

Drewry said that much of the cost savings that Comcast executives described are already being done by Walt Disney, "and will likely occur whether a merger happens or not." CSFB predicts that a higher premium would have to be paid for Comcast's bid to be successful.

"We also believe that Comcast needs Disney a lot more than Disney needs Comcast," Drewry wrote.

Merrill Lynch analyst Jessica Reif Cohen said she regarded Comcast's offer to be an opening salvo. While Comcast's rating was reduced from buy to neutral, it was more on concerns about the deal being in limbo.

"We regard Comcast and Disney as perfect merger partners, and Comcast's long history of deal execution has been completely extraordinary in terms of shareholder value creation," Cohen said.

"We've Walked Away [Before]"

Roberts, while describing in general detail his conversation with Eisner on Monday, said he hadn't communicated with anyone else on Disney's board of directors.

"It was made clear that it wasn't an immediate interest by Mr. Eisner to put it [a deal] together," Roberts said. At the same time, Roberts said he regarded Comcast's "next logical step" to be in content. He said that Comcast was a disciplined buyer and seller that has a lot of experience in mergers--including the AT&T Broadband acquisition of a company 1.5 times its size--and one that isn't afraid to get out of a deal if it isn't right. Comcast had planned to acquire MediaOne, but backed out before the deal was completed.

"We want to be successful, but we want to be disciplined and thoughtful about it. We've walked away from big things before. On multiple cases, we didn't bid on Vivendi. We walked away from Media One. Life goes on," Roberts said. "There's always another way. I think that this is an offer and I hope it's very compelling."

Roberts said Disney would remain headquartered in Anaheim and that Comcast would continue in Philadelphia.

"We want to make this as friendly as possible, as fast as possible, and we do believe this is a very compelling offer to Disney shareholders," Roberts said.