Filed by Comcast Corporation
Pursuant to Rule 425 under the
Securities Act of 1933 and deemed
filed pursuant to Rule 14a-12
under the Securities Exchange Act
of 1934
Subject Company: AT&T Corp.
Commission File No. 1-1105
Date: July 10, 2001
The following conference call was held by Comcast with its investors on
July 9, 2001:
Comcast Investor Conference Call
Conference Call with John Alchin, Brian Roberts & Stephen Burke
July 9, 2001
Good morning, everyone, and welcome to the Comcast Corporation financial
community meeting and conference call to discuss Comcast's proposal to merge
with AT&T Broadband. If you have not yet received the press release, please
call Renee Calabro, of the Abernathy McGregor Group at 212-371-5999. With us
today are Brian Roberts, President of Comcast Corporation, John Alchin,
Executive Vice President and Treasurer of Comcast Corporation, and Steve Burke,
Executive Vice President and President of Comcast Cable.
During the presentation, all participants will be in a listen-only mode.
Afterwards, you will be invited to participate in the question and answer
session. At that time, if you have a question, you will need to press the one
followed by the four on your push button phone. As a reminder, this conference
is being recorded today, Monday, July ninth of 2001. Now I'd like to turn the
call over to John Alchin. Please go ahead, sir.
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JOHN ALCHIN
Well, thank you very much and welcome, everybody. This is obviously a very
exciting day in the history of Comcast. With us here today we have virtually
the entire Comcast management team. In addition to those of us up here, we have
in the audience our Chairman, Ralph Roberts. We have had numerous calls
throughout the evening and the morning from our colleague Julian Brodsky, Vice
Chairman, who is tucked away in some fishing village somewhere outside of
Stockholm, but very much a part of what's going on here.
In addition, we have Larry Smith, our Executive Vice President, Arthur Block,
our General Counsel, Bill Dawdleman, Marlene Doone, both of whom all of you as
investors know very intimately. Karen Buchholz, Head of Corporate Communication
and many other members of the team. But most importantly, we have up here our
President, Brian Roberts, and President of the Cable Division, Steve Burke.
My only role here this morning is to refer you all to the safe harbor
disclaimer, because we will be making a lot of forward looking statements,
which have the usual caveats attached to them for SEC purposes. Without any
further ado, please let me bring up Brian Roberts.
BRIAN L. ROBERTS
Thank you, John. And thank you all for those in the room here today for coming
on short notice. But this really is a fantastic moment for Comcast, an exciting
opportunity to think about a company that could have the number one position in
the U.S. in broadband with 22 million customers, have new technology that
allows for great growth in products and services, such as video on demand and
interactivity. And it's very exciting, and a strategic opportunity that we just
felt we could not pass up.
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So let me begin with the terms of the proposed transaction - make sure we're
all on the same page. Basically, AT&T would spin off their broadband business,
just as they had proposed. Comcast is saying that we would offer 58 billion
dollars in a mix of equity and debt, for just the cable systems that AT&T
operates, and the joint ventures that they're partnered in, not at this point
including their interest in Cablevision, Time Warner and Rainbow, which we
would be prepared to pay additionally for either more equity or more debt, and
we would issue 1.0525 billion shares of stock, and 13 and a half billion of
debt, and that would then qualify, with a mix of voting and non-voting Comcast
securities, as a tax-free transaction to both the AT&T shareholders and to AT&T
itself, in terms of the spin off. In a Morris Trust spin off. What this would
allow is a rapid acceleration, and a significantly better outcome, I believe,
for the AT&T shareholders than the deal that they're currently preparing to do.
What they're currently doing is they filed last Tuesday, an acceleration of
their timing of their proxy mailing, which would go at the end of this July,
with a shareholder vote in September. And when that happened, we concluded that
the train's leaving the station, and it was now or never.
So by making this proposal, we're able to complete something that AT&T itself
began back in October. Last October they said they're going to break the
company up into four parts, that the cable business no longer would be part of,
within a year or so, the traditional Ma Bell telephone business, the long
distance business. And so, they decided to spin it off as a separate company.
We can then spin it and merge it right away with Comcast, avoid a tracking
stock, avoid IPO discounts, and pay a significant premium right now.
Now the premium that we're talking about, the price we're talking, the 58
billion, is 12 dollars and 60 cents on Friday's close, per AT&T share, which
compares to the 16.80 that AT&T was trading at when you spin off the wireless
stock. So on Friday they went X dividend on wireless, and the closing price was
16.80 on the new AT&T, and this is fully 75 percent of the total value of AT&T,
would be for the two billion of EBITDA that is represented by cable.
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And we think that's very, very compelling, not to mention that their
shareholders, the AT&T shareholders would then own 51 percent of the combined
new entity, and all the upside that could be created by this great company,
would go 51 percent to their shareholders. And of course, that doesn't include
Time Warner, doesn't include Cablevision, and doesn't include all of the
traditional long distance business.
So it's consistent with their current goal, it's a rapid acceleration, and I
think a dramatically better price.
What would we have? Well, you'd have 22 million subscribers, and an
accelerating company because of significant and ongoing cost savings and
synergies, which Steve Burke is going to go into great detail, or some detail
on, and you know, give you a sense of the realistic nature, I think that's
really essential here, is how strongly we feel, and how what we think
conservative we've been in looking at how we can make this happen.
And we will have a solid financial footing, with the mix of debt and equity
being issues, we're confident we will remain solidly investment grade, and
we'll be the third largest media company in the world, and the largest in the
broadband space. This is a once in a lifetime opportunity to create a company
of this size.
Look at it graphically in revenues, you can see we'll be twice the revenues of
the largest competitor, and close to 15 billion dollars. You'll have twice as
many customers, well within the regulatory limits. I want to stress that even
had the old 30 percent test remained, which of course the courts knocked it
out, this company would be inside that test. Because you're not including Time
Warner and Cablevision, and that's not our intention to hold those assets, and
therefore, we think that this is very, very realistic but as you can see, a
leapfrogging in what this one company would then be able to have.
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Powerful national presence. Eighty-five percent of the company's combined
subscribers would be located in the top 50 DMAs, but there is no national
presence in cable, we've all been very regional. But boy, what a presence it
would be. In the top ten markets, we would be the leader in cable presence in
eight of the top ten. We would have 70 percent of all customers in the top 20,
and greater than a 45 percent market share in 14 of the top 20.
Again, unrivaled presence. So you really have to say, okay, what's the benefit
of having that presence? What's the benefit - you know, it seems too obvious to
me, having worked in this business for 20 years, this is a dream opportunity to
have that kind of scale and scope. You can develop new programming content,
with the new technologies we can be a leader in creating services like Internet
protocol phone, services like video on demand, advertisers now have a national
reach for cable advertising.
Internet. With what's happening with cable modems, to think of one company that
has 22 million connections, to me the opportunities will come and every good
idea, forgetting any of the cost synergies, which Steve will get to just in a
moment. Every time we've been able to create something like a QVC or an
E-Entertainment or a Golf Channel, there have been billions of dollars awarded
to the Comcast shareholders for that. That's the scale and scope benefits, on
new value and new content, very, very exciting.
Let me at this point, we want to go deeply into sort of the operating
characteristics of the AT&T systems, or the Comcast systems, and our history in
acquisitions. Steve Burke has led Comcast Cable to I think the pinnacle for
cable operators, and was just acknowledged at the Cable Convention, by the
National Cable Television Association as the best operator this year. But more
importantly, we doubled the size of Comcast Cable in the last 24 months.
In doing so, in a number of acquisitions, whether it was Media One, Lenfest,
Adelphia swaps, Jones - Steve and his team that he's assembled have an
aggressive, get it done attitude, they visit
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every single system right away, reforecast it, and they put the numbers on the
board. So I think you'll be pleased when you hear Steve's presentation. Steve
STEPHEN B. BURKE
Thank you, Brian. I think the best place to start would be an examination of
our margins versus the AT&T margins, over the last five quarters. What we've
tried to do is be as conservative as possible, and in fact have taken our
reported margins, when you look at our reported margins and analyst reports,
they're higher than these numbers. We've allocated a significant portion of the
company's corporate overhead to our margins, to bring them from the 43 percent
range down to 41, and at the same time we've taken AT&T's margins, which I
think in the first quarter were reported at 16 percent, and taken out
restructuring charges to bring those up to 18.
So we really tried, in every instance, to make this disparity as narrow as we
could, and be as conservative as we could. In addition, as it relates to
accounting policies, we've now taken in more than million subscribers from
AT&T. We know their capitalization policies, we know their accounting policies,
and based on the systems we've taken in, and we believe they're representative
of the entire company, our accounting on the whole is more conservative than
AT&T's.
So I think this gap in terms of margin, if anything, is bigger in reality than
what we're showing, but we wanted to be as conservative as we could. And what
you see here is a pretty consistent 20 percent plus gap in margin, between the
AT&T systems and Comcast systems. If you take that gap, and we're using the
last, quarter, the first fiscal quarter, that 23 percent gap, if you apply that
to AT&T's revenues, which are on the order of nine and a half to ten billion
dollars, you'll see that if you were able to completely close that gap, you'd
have a 2.3 billion dollar improvement, in terms of operating results per year,
if you could take AT&T systems up to where Comcast's is currently operating.
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And if you ask where that improvement would likely be found, what we typically
do when we get control of a new system is 30 or 60 days after taking control,
we would visit the system with our entire senior management team, and lay out
the existing economics, line item by line item, of the system that we're
acquiring, versus a Comcast system of the same size. And we'd go and we'd look
at revenues, and we'd go down and march down each line of the P&L, and what we
found in all the acquisitions we've done is there's the ability to improve
almost every single line of the P&L.
And I'll take you through some of the examples, but for example, when we look
at the AT&T systems that we have taken into the company, very frequently we can
have revenue improvements related to increasing the pay business. The systems
we took in earlier this year, we're getting on average, seven dollars per
subscriber, per month, more from just HBO, Showtime, Starz, Encore, premium
services. We find that our deals for digital services with programmers, and the
way we package that tends to make that a profit improvement.
Moving down the P&L, we have the ability to better match labor with activity,
and we have a very precise way of looking at number of employees per
subscribers. These kind of observations become very obvious very quickly when
you're in effect doing an apples to apples comparison - a hundred thousand
subscriber system that you're bringing in, versus one that you've been running
for some period of time.
Marketing costs, AT&T is running about five or six percent of sales for
marketing. Our numbers are about half that number. So marching down the P&L, we
feel very confident that we can identify significant operating efficiencies.
In addition, we also believe there are productivity improvements that you can
get as you scale up this business. As you pull cable systems together in bigger
clusters, whether it's call centers, whether it's the ability to amortize, more
senior level management that can be more sophisticated
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and drive the business more aggressively, we think as you put these businesses
together, there are economies there.
In terms of corporate overhead, according to published reports, we believe
AT&T's corporate overhead is upwards of 500 million dollars a year. We've
looked at their systems and we would take their 13 and a half million
subscribers and probably create on the order of seven what we call divisions,
of about two million subscribers per division. Each division inside Comcast
right now has between five and seven million dollars of annual overhead. So you
multiply that times seven divisions. We can't see a reason why we can't take
that corporate overhead down to a number below 50 million. So from upwards of
500 million down to 50, we've done this time and again, we see no reason why we
can't do it this time.
As it relates to the telephone business, we actually believe that telephone has
a great future in the cable business. We have been waiting for IP phone,
Internet based telephone, and have not been aggressive in terms of circuit
switch telephony. We do have some phone business that we acquired, in Media One
systems that we acquired from AT&T, about 150 thousand subscribers in the
Michigan area. We have kept those operations going, and during the last six
months have taken those operations from a significant money loser to break
even, and we believe next year we will make money in those phone operations.
We believe, based on published reports, that AT&T is losing on the order of 500
million dollars a year in their telephony business, and our goal would be to
take that to break even, as fast as we could, and we believe that would be
doable in the next 12 to 24 months.
So, as a result of all these, different opportunity areas, we feel highly
confident that we can go after that margin differential aggressively. In
addition to just taking the margin up, there are certain economies that we
believe accrue to those who get bigger. And when you take a company with eight
and a half million subscribers, put it together with a company with thirteen
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and a half, and create a company with 22 million, we believe there ought to be
significant economies of scale in three major areas.
First, programming savings. We've identified a range of 300 to 500 million
dollars that we could save on an annual basis over the next three years, simply
by merit of taking the eight and a half million Comcast customers and their
contracts, and bringing them up to the level of the of the AT&T contracts, and
then, over time, renegotiating all of the contracts, based on the fact that we
would be significantly bigger.
At the same time, we're making programming economies of scale, we believe in
terms of hardware, all of our capital expenditures, whether it's digital set
top boxes, cable modems, rebuilds, et cetera, we believe there's the ability
there to leverage efficiencies, and also other savings, on billing contracts
with our billing vendors, straight through the P&L, we believe there's the
chance to in addition to bring their margin up to our margin, or get closer to
our margin level, just the fact that bigger tends to mean better deals in our
business.
If you take all of these savings, and assume you get them all, you would come
up with a number of 2.6 to 2.8 billion dollars, 2.3 billion from taking their
margin up to our margin level, and then just taking the programming, because
the hardware savings are really appropriately capex, just taking the
programming savings of 300 to 500 million, you get a total number to shoot for
of 2.6 to 2.8 billion, and that would in effect be, if you could take their
systems up to our operating performance, and get the economies of scale, we
think could happen by putting the companies together.
We have assumed, in the interest of conservatism, that we only get 1.25 billion
out of that 2.6 to 2.8 and as you'll see, the deal economics work beautifully
at that level, and we think getting less than 50 percent of the total possible
savings is a conservative assumption.
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By the way, if you look at the last ten big deals that we've done, during the
90's and into the last year or so, if we only got 50 percent of the
differential, it would be the worst performance we'd ever done on any of those
ten deals. So we think this is a very conservative assumption, which our job
would be obviously to beat.
If you then look at how the savings, assuming the 1.25 billion is all we save,
how that would flow into the business, we're anticipating four to six hundred
million in year one, growing ratedly over time to year three. Again, this would
be slower than the speed at which we've realized savings in other acquisitions,
but if you look at the outline point at the bottom of this slide, assuming we
got four to six hundred million in realized savings in year one, let's say that
happens in the year 2002, it would take the multiple from 30, which is what
we're paying to AT&T shareholders on day one, down to a 15 or 16 percent range,
which is accretive to Comcast shareholders and then in year two and year three,
everything would be on the up side.
If you then look and say, well, how likely are we to achieve these estimates? I
think the best thing you can do is point to your track record and your
experience. We've grown revenues 13- fold since 1990, and a lot of this growth
has come through the integration of 11 significant acquisitions. We've almost
doubled the company over the last two years, we've done five major deals in the
last 24 months. And at this point, our entire management team has been through
acquisition after acquisition after acquisition, and that gives you a fair
amount of experience and confidence that should the occasion arise again,
you'll be able to do it the same way you have in the past.
Here are three deals that we have concluded in the last 24 months. Each of
these deals are about a million subscribers. I think the Scripps deal was 860
thousand, Lenfest was a million two, but these are all significant,
multi-system acquisitions. And I'd like to bring your attention to the second
line, the operating cash flow improvement.
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In the case of Scripps, in the first 24 months, we were able to bring operating
cash flow up 54 percent. In the case of Jones Intercable, within one year we
brought cash flow up 25 percent. Lenfest within one year we were able to bring
cash flow up to 34 percent.
The Lenfest example's particularly interesting because if you look all the way
at the bottom line, you'll see that operating cash flow per customer, which we
think is a very key index in managing operating performance, at Lenfest, we've
been able to bring it from 150 dollars per subscriber, which is right about
where AT&T systems are today, up to 200 dollars per subscriber, within the
first year, which is a 32 percent growth rate.
So we think these acquisitions show clearly that time and time again we're able
to improve the business. But I think the best example is taking the actual
systems that Comcast acquired from AT&T, just over six months ago, on January
first, and brought into our company. And that's what the next slide shows. This
represents about 765 thousand systems that we acquired from AT&T on January
first.
And in the first six months of controlling these systems, we've already taken
the total operating cash flow up 32 percent, and the margin up six percent. My
feeling is this first year performance is really only just the beginning. I
would anticipate, if we can do this in the first year, that the numbers in the
second year and the third year are going to be very, very robust, perhaps the
second year could be another 30 percent plus growth rate.
And as you can see, that margin went from 26 to 32 within six months. Our
feeling is, based on these systems, we have a shot to bring them all the way to
41 percent, over the next 12 to 24 months. So I think we're off to a very good
start and we believe these systems are representative of what we're going to
find, should we get in and get a chance to put the 13 and a half million AT&T
subscribers together with Comcast.
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So I think this kind of track record, through the 11 acquisitions that we've
done in the last 10 or 11 years, through the five major ones in the last two
years, and most specifically, through our experience with the AT&T systems,
gave us a lot of confidence, as we were thinking about taking the step we took
last night, that should we get our hands on these assets and put the two
companies together, we could deliver the kind of operating efficiencies that
we're talking about.
If you take all these acquisitions and all this growth, one of the slides that
I'm most proud of and you map our margin performance, it's a complicated slide,
but I think it's worth paying attention to. The yellow bars show our operating
cash flow, and you can see it goes from eight hundred million dollars per year
to up toward two billion a year. And a lot of that cash flow growth is
obviously due to acquisitions.
The orange line shows our EBITDA margins. And what you'll see is, despite the
fact that time and time again we've integrated new companies, usually with
margins that are significantly lower than ours, we've been able to hold our
margin. Which means we've been able to very, very quickly get the margins of
the companies we've integrated up to our level. And I think this chart gives us
a lot of confidence that should we get a chance to put AT&T together with
Comcast, we could continue this kind of track record and performance. Brian
STEPHEN B. BURKE
Thank you, Steve that was fantastic. You know, the way he does it, he takes his
entire team, they visit all the operations, as I mentioned, I'd say in the last
18 to 24 months they've been in over 50 different cable systems to do the kind
of drill down that he just referred to.
Okay, so if you put it all together, and you can get to the 1.25 synergy, or
1.3 billion of synergy, you would take the combined EBITDAs, that is, about
five billion between the two companies, and that would grow to 6.3, and that is
about 20 billion dollars of value creation that would be
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mostly going to the AT&T shareholders, some of it going to the Comcast
shareholders, in the way we divided it, but tremendous power in putting the two
together.
What does it do to our credit profile? Very important question. We've had
preliminary meetings with the rating agencies, and we certainly expect them to
do the kind of typical reviews that are necessary in a big proposed
transaction, but the preliminary S&P put out that if we do what we're talking
about, they don't envision a change in our debt ratings.
And that's because, looking at the numbers, you can see that Comcast's pro
forma debt, assumed debt from AT&T and then, without synergies, you're at 4.7
times, you still have lots of other off balance sheet assets, and with the kind
of synergies we're talking about you get to 3.8. And of course, this is in '01.
And off of '02, the leverage rations go down again, another half a point or so.
So we think very solid balance sheet. That's critical. We're not really
interested in doing any kind of transaction that would change the credit
characteristics of Comcast, and I think we're pleased that we're off to a good
start there.
But let me go back to why this deal makes so much sense in terms of what else
it can do for Comcast. It allows us to take the fastest growing part of the
company, which is our content division, and really turbocharge it with 22
million customers as a platform. And our record of doing this successfully has
I think been fantastic, starting with, first and foremost QVC.
QVC is the world's largest e-commerce company, we'll ship over a hundred
million packages with a 40 percent operating margin this year, bigger than
Land's End, L.L. Bean and Amazon combined. And we've taken the EBITDA in the
six years that we've controlled QVC from 200 million and more than tripled it
to 620 million, and this year we're off to a great start, we're up 20 percent
in the first quarter.
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E-Entertainment, since we took control of E-Entertainment 3 years, we were able
to grow the customer base by 40 percent. The ratings are at an all time high.
EBITDA's over a hundred million this year, and it's one of the mainstay
channels. Golf Channel went from zero to a hundred million in five years; we
now own 90 percent of Golf Channel.
Comcast's SportsNet, we have one in Philadelphia, one in Washington and
Baltimore, that covers about 50 percent of our customers, and we get terrific
television ratings. So content is a big part of how you build value.
At the same time, you can build value through investments, and Larry Smith and
others have taken advantage of a number of deals, Julian, over the years that
come in because we're Comcast. And by having a bigger footprint, we think we'll
get even more opportunities to create value for the shareholders than we have
in the past, but just in the past alone, we invested a 940 million dollars in a
variety of transactions. And we have monetized or locked in seven billion
dollars of value today. Seven times our money.
We have a very proud and solid track record of creating off balance sheet value
which can then be monetized for shareholders, and this deal would allow a lot
more of that.
But the single thing that I am most proud of, and I think Ralph is most proud
of, is that Comcast is a disciplined buyer. Somehow, we have managed, over 29
years, to have a compounded return on our equity of 24 percent. If you had
invested in the IPO, and bought a thousand shares at seven dollars, for seven
thousand dollars you'd have 3.9 million dollars today.
At the same time, we've had to grow the company by acquisition. We've probably
done over a hundred deals. And the company of course goes back to even before
we were being public, and it's the same kind of results before public. And we
found a winning formula, which is, every time you buy something, by definition
you're out and doing something no one else is doing.
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But if you can do it just right, you can create future value and future growth
for your shareholders that would otherwise not be there without that
acquisition. And this deal is the best opportunity that we have seen to give us
the future that could replicate the past. And we wouldn't do anything if we
thought we were going to jeopardize the ability to continue this slide. That's
the number one thing I'm most proud of.
And the point here is, is that by putting the AT&T stockholders together with
the Comcast stockholders, directly accelerated, at a big premium, this is what
could happen to their shareholders in the future.
If you look at just the last three years, it's even more dramatic. We've had
168 percent appreciation versus a 23 percent appreciation on the S&P. And this
one, frankly, I had never known before we put it together for this
presentation, but if you actually go by any period of measurement, one year,
three year, five year, seven year or ten year, and you compare Comcast's stock
performance, the Comcast to the cable composite, of Cox, Cablevision, Adelphia,
and Charter, or NASDAQ, or the S&P, in every single period against every other
metric, our stock has been outperforming all of those folks.
And that's what it's all about, and its our job to find opportunities that can
do this for shareholders, can do it for the AT&T shareholders, instead of the
path that they're on.
So what you'd have is a leader with the presence in eight of the top ten
markets. You'd be in some way, in 18 of the top 20 markets. You'd have 22
million customers in this expanded platform. What we think we bring to the
party is Steve and his team, and the rest of our folks, which is a proven,
reliable track record that you know you can get this kind of result, and
ultimately, leadership that is focused on creating shareholder value with the
industry leading returns of 24 percent.
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You step back, we would have the new leader in broadband. Fabulous company,
premier national network, compelling new opportunities, real financial
strength, we're not doing anything to limit our ability to grow and create
these new technologies, and have a growth stock with expanded margins and
multiples. We're very excited, we'll be happy to take questions.
UNIDENTIFIED SPEAKER
Can I start off with a couple of questions on the cost side? You talked about
the AT&T telephony business and the losses they're absorbing there. I wonder if
you could be a bit more specific about how you plan to reduce those to, you
said I think, break even in the 12 to 24 month period. And specifically, would
that include stopping the further roll out of AT&T's switch telephony, as you
wait for IP, and maybe a related question on capital spending. You talked in
the presentation about capex savings of up to 500 million per year. Could you
be a bit more specific about where that comes from? Is it simply a matter of
greater scale economics from purchasing or anything else? And then a final
question ... if I can. A very quick one. I may have missed it, but there
doesn't seem to be a time limit on the offer. Is there any period at which this
offer expires?
STEPHEN BURKE
Let me ... if this works. Let me start on the telephony business. I think our
approach in Michigan would be representative of what we would do, realizing
that obviously we need to get into the company and really see what's going on
precisely. But our understanding is that AT&T has rolled out telephone to about
11 million of their homes, and our approach would be to say, in the markets
where you've currently rolled out the business, we will continue to operate the
business. We will examine new markets on a go forward basis, but only if those
markets show the potential for us to be profitable.
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And at the same time, have an eye toward rapidly developing IP phone, which we
believe is the future. That's the approach we've done in Michigan. We're still
marketing the product. We are not expanding the footprint. And what we found
is, when you put your attention on a smaller number of homes, and focus it, and
use your cross channel spots on the air, use your call centers, et cetera, you
can dramatically improve the economics of the business.
BRIAN L. ROBERTS
Let me say that we believe telephony is a huge opportunity in the future, and
we've got to find a way to segue from where they are to where we want to
ultimately be. That said, first and foremost job is to get that margin
improvement that we talked about, and I think we found a formula, but as we get
in there, if we have to adjust course, we will. I will say, to your second
question, or your third question there, this is not a proposed contract. In the
letter we say we'd be prepared to sit down with your representatives and do
that.
But we're prepared to stay. We want to make this happen. We didn't start this
to not find a way to be successful. We hope the board is going to take a
serious, hard look, because here they are, basically saying, it's their plan.
They were going to spin off this company and give it to their shareholders. And
they were going to do it through several steps which, as a stand-alone company,
made sense.
We come along and say, hey, we'll give you our stock, tax free to your
shareholders now, at a big premium, that as you can see, is fine and fair for
the Comcast shareholders, and both of us can win in the future. And hopefully
they're going to be focused on maximizing that shareholder value, once they
decided to break up AT&T into the four parts.
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STEPHEN B. BURKE
Let me just come back to the capital question. I want to touch on the capital
question. We believe that the combined companies, we have a very disciplined
approach to how we spend capital expenses. We believe that when you put the two
companies together, it's very reasonable that we could have a five to ten
percent improvement in terms of capital spending because of the combination.
TOM WOLSTEIN
Tom, Sanford Bernstein. You're increasing the subs by about 158 percent. The
difference in this acquisition from other acquisitions, I think, is that the
other acquisitions to a great extent have been to fill in holes in the
doughnut, to take contiguous systems and put them on the side systems that
already are up and running, and running well. You've used the same managements
to do that. But now you're going to the other two-thirds of the country,
Central and West, where you don't have large-scale existing systems. Doesn't
that make the whole process of enculturation and management much more difficult
than what we've seen in the past?
BRIAN L. ROBERTS
Let me give you a couple of thoughts on that. Steve, you might add to this. But
first of all, I can remember when we did a deal called Group W, where Comcast
doubled in size, and we were less well prepared for that than we are to do
this. We've been on a plan ever since recruiting Steve, when we sold Comcast
Cellular, we kept the entire senior management team. We've been waiting to
build a company and use these folks to build this kind of organization. That's
why we also took less than half of equalizing.
That's why we staged it in over three or more years, to get there. So I think
we're trying to be practical, we're trying to be realistic. We know Rome is not
built in a day. We have a wonderful
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team, though, the nucleus of which wants to grow. And when we doubled in size
in the last two years, you could have asked the same question. And guess what?
We're right you saw the chart, I agree with Steve, it's that straight line on
margins that said it all. We haven't missed a beat as we've taken in other
operations.
This will be a little harder. We've given ourselves plenty of cushion, to have
time, and not have to have the same standard of success in order for this deal
to be successful, but boy, there's a lot of upside if we can make it like every
other deal we've ever done.
STEPHEN B. BURKE
Just to expand on what Brian said, Tom, I think we've been planning for this
day for a long time. We started something called Comcast University, which is a
very GE-like management development program, a couple of years ago. We have the
top 50 executives. It takes a lot of people to run a big cable operation. It's
not just Brian and Steve. We have the top 50 people inside Comcast have all
signed long term contracts, and have all been very carefully put in place. And
for the last couple of years, we've been saying to ourselves, what happens when
we double in size?
And I think it is going to be challenging. It clearly is going to be a big, big
step for the company, but I think we've got a group of people that have proven
they can do it. They'll be doing it on a bigger stage, but I wouldn't bet
against them.
ELLEN GIBBS
Ellen Gibbs, of CRI. What's the timetable now? What happens?
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BRIAN L. ROBERTS
Well, Ellen, I think, you know, we take it one day at a time. We've sent the
letter; we obviously wanted to explain this in greater detail this morning. The
timing that drove us to last night was that on Tuesday of last week, they did
this accelerated timetable for themselves and we're prepared to go for whatever
period of time it's going to take. It's obviously going to be controlled a lot
by the AT&T board. And, what we have to do is really try to create the
comparison between what would happen if they proceed on the path they're on,
versus this opportunity, and hopefully build some momentum.
ELLEN GIBBS
(Unmiked) (Inaudible)
BRIAN L. ROBERTS
We'll have to see.
ELLEN GIBBS
There's no timetable, I mean there's no set date or something?
BRIAN L. ROBERTS
Well ... one day at a time.
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LAURA WARNER
Hi, Brian. Laura Warner, from Lehman Brothers. I just wanted to get your
perspective on at home, if this deal goes through, and you're a 22 million sub
broadband provider, how do you view that asset now? Is it included as part of
the deal, and is it likely that we'd see you keep it or do you still plan to
proceed to take back some of your data centers, et cetera?
BRIAN L. ROBERTS
Well, we look at Excite at home as another ISP. And our public position has
been that we're testing and trialing multiple ISP's, we've begun the process to
try to find a way to maximize our cable modem business. I think we start in
first and foremost, we're looking at this, as cable modems have been a raging
success. We're ahead of our own internal projections by a lot and we're having
a great year, and we're anticipating an even better second half.
So, you know it's a relatively small part of the equation, but you know, it's
something we'll have to take a look at. Let's take one from the phone. They're
telling me to be fair to the phone here.
OPERATOR
You have a question from Jack Grubman, with Salomon Smith Barney, please go
ahead.
JACK GRUBMAN
Yes, I do. Good morning guys. A couple of questions. One, if you looked at the
proxy on July third, and the debt that AT&T went through on the broadband side,
there was about 28.8 billion in net debt, from the proxy, let's take out the
monetized securities of 8.6 and the 2.4 billion of proceeds from the cable
sales, that they're about to get. That still leaves about 17.8 billion of pro
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forma debt versus the sort of 13 and a half billion dollars of debt that's sort
of included in your offer. Can you maybe just discuss that?
And then a second question, you know, you talk about perhaps, buying in the
unconsolidated assets, such as TWE, and Cablevision and Rainbow. Obviously for
TWE there's, you know, probably one natural buyer of it, and for say
Cablevision, history shows that big blocks of stock that come to market, from
sellers usually come at a discount. At over what percent of say safe value, for
a lack of a better term, do you just not go above to take those assets from
AT&T, given that, you know ...
BRIAN L. ROBERTS
Okay, Jack.
JACK GRUBMAN
Okay.
BRIAN L. ROBERTS
Thank you. We're just ... it's scratchy in the room here, a little echo. I
think I got the sense of the question. And we're not going to negotiate this
here today publicly, so we've made an offer. What the offer basically says is
here are the assets that we're pricing today. So, the 13 and a half billion of
debt relates to the number you're referring to, 20 or something I think I heard
you say or so, give or take. The difference is Time Warner and Cablevision,
after taxes. And the net proceeds.
And so, our attitude is hey, whatever the value is, the value is. They're on a
track to monetize those assets, and we're basically signaling here that that's
fine, they do what they want to do.
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Here is what we're doing this deal for, we want the 13 and a half million
subscribers in the joint ventures. This is completely consistent with the plan
that they're already doing, and, you know, whatever those assets are worth, I
think there's appraisal processes going on and stuff like that, and we're
basically saying, hey, we're going to stay out of that. It is what it is.
Next question? Yes.
JOAN LAPPIN
I don't know if you're willing to comment on this. I'm Joan Lappin, in Gramercy
Capital. It seems as if these AT&T assets are so badly mismanaged that the
opportunity for you is almost limitless. The question is, are they bad because
what AT&T bought was terrible, and they have been doing their best to try to
dig out from what Mr. Malone sold them, or do you think there are other issues?
BRIAN L. ROBERTS
Well, let me try and take out the colorization on that one.
And just, as our sensitivity trainer would say, vision up.
BRIAN L. ROBERTS
So in visioning up, I would say that the Media One assets are terrific. We made
no secret that we were prepared to try to buy them. I think they've sold some
of the old TCI systems, for by the way, way less price than what we're talking
about here, and way less price, than perhaps even their IPO. So I do think that
today's portfolio, we can, we believe has got some terr ... and they've done a
lot of swaps. So their clusters are way better than and in terrific cities. And
when you look at the combined company, we get very comfortable that this is
doable, that we're the
23
right people to do it, humbly said, I'm sorry. You know, that we think we have
the folks who can do it, and I'm sure they've been doing their best. I'm not
going to go there and say anything as to why it is the way it is.
That's just what creates this opportunity. It's what, you know, makes it so
compelling. This is not a step that we've you know lightly thought about and
said, oh let's just, hey, throw in a letter. I mean, this is a very well
thought and very agonized over because we really did try to do this privately.
And, here we are. So you really have to believe that this is a quantum leap,
and it's such a great opportunity that it's worth all of the difficulty of
going through the process. Yes?
UNIDENTIFIED SPEAKER
Brian, in your last comment you alluded to obviously the fact that you tried to
do this quietly. Could you just give some color on what the obstacles were,
versus, what the obstacles have been in terms of price versus structure? And
then also, just a couple of operating questions. One for Steve, what do you
think the easiest synergies are from day one? It seems like the overhead
reduction is a lay up, but could you speak to some of the other things that can
do there?
And the last question, Steve, there's a lot of things going on here in terms of
having a huge national platform going forward. Can you just speak to how you
might run your advertising business going forward, since you talked about that
so much as being a big opportunity?
BRIAN L. ROBERTS
I'm going to be very brief on my part, because we're going to try to you know,
we want to make a deal here. So what's happened privately, we didn't reach an
agreement. I think we wanted to do an acquisition, because in our view, they're
spinning it off and they're giving it to their shareholders. Why not then let
those shareholders merge it into something at a bigger price, and
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get a growth stock and take advantage of the synergy that I'll now let Steve
talk about. But there were the traditional things that happen in acquisitions
and you know, here we are. Steve:
STEPHEN B. BURKE
Well, I think in terms of synergy, you're right, the most immediate impact
would be the overhead savings, and we would anticipate getting those literally
right off the bat. That's been our experience. And then after that, the other
savings would come from a dozen things that would come in ratably over time. So
I think the immediate impact would be overhead. Telephony, I think to the
degree that we could get our arms around it quickly, could be a relatively
early win, if you will, and then everything else would come in. That's been our
history, that's how the company has gone.
In terms of ad sales, I think this will create a truly incredible platform. If
you think about having a leadership position in eight of the top ten DMA's, and
the kind of position in 14 of the top 20 that Brian referred to, that gives us
the ability to compete with really any kind of the broadcast station groups,
and really do all sorts of wired networks and all sorts of things, to go to
advertisers and give them the ability to micro-target, but also get a national
presence.
As you know, it's been very, very difficult for advertisers to tap into local
cable, because they never knew if the ads were going to run, if they had to
deal with 15 different companies. The ability to walk in a door, and say I can
get you in eight of the top DMA's, and I can put you on the channels that your
customers are watching, let alone everything with interactive television and
advertising, I think is a huge, huge upside.
BRAIN L. ROBERTS
Dennis
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DENNIS LEIBOWITZ
Among the things AT&T has said are the reasons for the lower margin, are lower
than average penetration, and also lower than average rates, they held back for
political reasons or whatever.
Can Steve comment about what you do about that?
STEPHEN B. BURKE
Well, if you look at AT&T systems that we brought in, in terms of rates, I
think our average, rate per customer was within three percent of their rates.
So that the real improvement that we've been able to make, has been in driving
revenue through new products, through HBO, through Showtime, through selling
people more things that they want, and then the cost side. So I don't think
rates are a big part of the improvement story that we've had, or would have on
a go forward basis.
BRIAN L. ROBERTS
I think what we've been doing well is sort of digital selling, right now. And
it's an optional product to consumers, and we've targeted, how many subs, just
on the Comcast footprint? Close to 30 percent penetration by the end of the
year of digital. And that's industry leading number. Cable modems, the same
thing and different packages. So, it's being focused on every aspect of the
business.
You know something, maybe this is lost on, this is really what we do. I mean,
yes, we're in those other businesses and content, but we look at that as a very
decentralized way. We usually have partners in the programming businesses, who
have their own expertise, and we run them as very independent entities. What
Comcast has been all about for 38 years is cable TV system management. And it's
a lot of little things, and they're not all that glamorous, but that's what is
the bread and butter that makes these numbers happen.
26
STEPHEN B. BURKE
To your point about penetration, Denny, I think you could argue that lower
penetration should have a depressing impact on margin. I don't think that's
what's going on here. We understand these systems. If you do all the in's and
out's in systems, we got prior to this year, and systems we've gotten in the
last two months, we've taken in about 1.5 million subscribers from AT&T, a lot
of the systems that they have we're intimately familiar with going back five or
ten years. And when you have an entire industry where literally every single
operator is operating in the 40 percent plus margin area, it gives us great
confidence that our experience with the systems we've taken over is
representative of what we could do with the entire company.
DENNIS LEIBOWITZ
Brian, you've discussed the 500 million or so in losses that you think AT&T has
in the telephony area, yet in Michigan you were able, within six months, or
within a year, to take Michigan to break even on telephony. What are you doing
different in circuit switch telephony, and how are you improving those margins
so quickly?
BRIAN L. ROBERTS
Well, I think the first thing is, when your goal is to put on as many units as
you can, and to rapidly expand your footprint, it encourages you on a marginal
basis, to make decisions that may not be economic. I think the first thing we
would do is say, in the footprint that we're in, we're going to continue to
operate in that footprint. We're not going to establish a very, very aggressive
goal. We want to hit X amount of units by the end of 2002. Our goal would be,
let's get into the business, let's run this business as a business, and our
experience in Michigan has showed us, when you take your foot off the
accelerator, you're still driving the car, but you're not trying to go 90 miles
an hour. Once you bring it down below the speed limit, you can make money in
the business and bring it fairly rapidly to a cash flow basis.
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STEPHEN B. BURKE
Well, Cox has shown that. You have to remember that, I mean, AT&T has multiple
agendas right now. They're a long distance company, they have ARBOK entry into
long distance, in some states, and they have multiple revenues from phone. So
it's not just, is this good for cable? And we're putting a disciplined approach
around it. Next question back there.
GEORGE KING
Two questions ... George with Alliance Capital. One, I may have taken a comment
you made this morning out of context. I thought I heard you say something about
it's not our intention to hold those assets, in referring to the Time Warner,
E-Entertainment, Cablevision and Rainbow assets. And the fact that it's not
part of the original deal, would it be fair to leave this morning with the
impression that that's not really something you want to own, but if it needs to
be done to get the larger deal done, you would look at doing that, and then
maybe sell the assets later?
BRIAN L. ROBERTS
I think that you didn't take it out of context. I think that our view is that
whatever it's worth, it's worth. So if there is some minority discount or
something, that will be determined in the market place here very soon. They're
saying they're going to make that part of the tracking stock, so it's something
that they're planning to sell, and use to pay down the debt, and so they can
get this kind of credit rating.
We're not trying to interfere in any way in whatever ongoing valuation is going
on in those assets. I think Cablevision's relatively simple, it's a public
stock, it's easy to know what that's worth. So, given that we don't know the
tax basis, and we don't have any inside information here that we're just
basically saying, hey, it is what it is. From a regulatory standpoint, what the
long-term prospect is what brings us to the table is to run and own and manage
22 million customers, plus
28
the joint ventures, and wow, what a company that would be. We'll take one more,
keep going. On the phone, let's do one from the phone.
OPERATOR
Dan Reingold with CS-First Boston. Please go ahead.
DAN REINGOLD
Just want to ask another question on cable telephony, which is, what do you
have worked into your EBITDA margin expansion goals or assumptions, in terms of
the what sounds like a slow down in cable telephony roll out? Just want to know
what your base case is, and if it's possible, to compare that to what you think
AT&T's is, because I'm trying to get a sense of what the delta is in cable
telephony roll out?
BRIAN L. ROBERTS
I'm not sure that that's a fair characterization. I'm not sure that we know
what their plans are, because we've heard different reports of whether drilling
down, just as Steve said we would do, and not rolling it out to future markets
right now. I think we're on the cusp of a technological change, where you can
go from a ESS-switch that does, you know, millions of phone switches in a
month, in phone calls, for 20 million dollars, to a Cisco router that can do
the exact same thing for 50 thousand dollars.
And how much further do you want to deploy, and how fast do you want to go with
yesterday's technology, when you get all the digital features with tomorrow's
technology? And our guy Mark Koblitz, whose Chairman of the Cable Labs
Telephony Committee, and AOL-Time Warner's in the same space we are. That is
the future horse to ride. So you're on the cusp of a technological shift. Now,
AT&T had lots of their own agendas for why to get started now, and migrate.
29
But there is no disagreement in the technical community that that's the shift
that's taking place. So all we're talking about is how you stage it in. But
telephony, there's a hundred billion dollar a year proven revenue market, and
we've got the only other facility based competitor into people's homes, this is
a great opportunity for us long term. We just have to get in, get our arms
around it. It is important to use the newer technology long term, and I think
this sets up well for us to sort of do it the way Steve described. Last
question, really ... Jessica.
JESSICA COHEN
Brian, you could almost make a case that the six billion dollars of EBITDA that
you put in the slide to be seven or eight, with the margin improvements, the
overhead reduction, the program and cost savings, and that's pre-revenue
enhancement or basic penetration increases or higher digital penetration.
Sounds like capex is going to be a lot lower than we thought. Can you or John
take it down to the free cash flow level?
BRIAN L. ROBERTS
John, why don't you take a shot at that, and let me touch on it at the end?
JOHN ALCHIN
Thanks. If you look at our own numbers, Jessica on a stand-alone basis, we'll
be significantly free cash flow positive next year. You put the two companies
together, it looks to us as though AT&T Broadband has two to three years of
sign investment on a stand-alone basis. Put us together, we would have one year
negative, and then we'd be positive, so we accelerate the combined entity by
about two years, from where AT&T would be on a stand alone basis.
30
BRIAN L. ROBERTS
Let me just conclude then by saying that I agree with the sentiment that, you
know, we're trying to balance, hey, great enthusiasm with, let's have a dose of
near term reality, which is obviously critical to many investors. But the
philosophy that's guided the management team since the inception of the company
is, do what you think is right in the long term. And how do you build that long
term growth so you can put up a slide that says, over 29 years you can compound
24 percent a year?
And by building other assets, like a Golf Channel. If you think of BET being
worth three billion dollars for one channel, and the ability to create more
assets like that, is what is going to make this happen. It's all about trying
to find a way to take a 22 million footprint and have a company that's, I
think, in an unprecedented position to grow in the future. Thank you all for
coming.
(APPLAUSE)
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Note: The following notice is included to meet certain legal requirements:
FORWARD-LOOKING STATEMENTS
This filing contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. In some cases, you can
identify those so-called "forward-looking statements" by words such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue," or the negative of those words and
other comparable words. Comcast Corporation ("Comcast") wishes to take
advantage of the "safe harbor" provided for by the Private Securities
Litigation Reform Act of 1995 and you are cautioned that actual events or
results may differ materially from the expectations expressed in such
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uncertainties, many of which are beyond the control of Comcast. Factors that
could cause actual results to differ materially include, but are not limited
to: (1) the businesses of Comcast and AT&T Broadband may not be integrated
successfully or such integration may be more difficult, time-consuming or
costly than expected; (2) expected combination benefits from the transaction
may not be fully realized or realized within the expected time frame; (3)
revenues following the transaction may be lower than expected; (4) operating
costs, customer loss and business disruption, including, without limitation,
difficulties in maintaining relationships with employees, customers, clients or
suppliers, may be greater than expected following the transaction; (5) the
regulatory approvals required for the transaction may not be obtained on the
proposed terms or on the anticipated schedule; (6) the effects of legislative
and regulatory changes; (7) the potential for increased competition; (8)
technological changes; (9) the need to generate substantial growth in the
subscriber base by successfully launching, marketing and providing services in
identified markets; (10) pricing pressures which could affect demand for
Comcast's services; (11) Comcast's ability to expand its distribution; (12)
changes in labor, programming, equipment and capital costs; (13) Comcast's
continued ability to create or acquire programming and products that customers
will find attractive; (14) future acquisitions, strategic partnerships and
divestitures; (15) general business and economic conditions; and (16) other
risks
32
described from time to time in Comcast's periodic reports filed with the
Securities and Exchange Commission (the "Commission").
ADDITIONAL INFORMATION
Subject to future developments, Comcast may file with the Commission (i) a
preliminary proxy statement for solicitation of proxies from the shareholders
of AT&T Corp. ("AT&T") in connection with AT&T's special meeting which is
scheduled to take place in September 2001 and (ii) a registration statement to
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because they will contain important information. Investors and security holders
may obtain a free copy of the proxy statement and the registration statement
(when and if available) and other relevant documents at the Commission's
Internet web site at www.sec.gov. The proxy statement and registration
statement (when and if available) and such other documents may also be obtained
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Comcast, its directors and certain other Comcast employees and advisors
may be deemed to be "participants" in Comcast's solicitation of proxies from
AT&T's shareholders. A detailed list of the names, affiliations and interests
of the participants in the solicitation is contained in a filing made by
Comcast with the Commission pursuant to Rule 14a-12 on July 9, 2001.
33