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Payoff on AT&T gamble to take time, Comcast says

PHILADELPHIA — Comcast Corp. Chief Executive Brian Roberts made a $56 billion gamble last year when he pursued the purchase of AT&T Broadband: He bet he could turn the cable industry's biggest money loser into a cash machine.

Last week, investors got their first look at how his wager is paying off. The combined company posted a narrower fourth-quarter loss and raised a 2003 profit estimate for its cable-television operations. The company also lost 9,100 basic cable subscribers as customer cancellations at the AT&T unit outpaced gains at the original Comcast.

"AT&T Broadband is a fixer-upper," said Kurt Funderburg, an analyst at Harris Associates, which held about 6.2 million Comcast shares on Dec. 31. "That will skew results for the total company."

Roberts has told investors it will take time for the merger to pay off as the combined company rebuilds 65,000 miles of cable lines, trims as much as $2 billion in costs and reduces debt that tripled to $30 billion with the acquisition.

Investors say they'll give Roberts a year. "I expect to see the trend going in the right direction," said Cynthia Cole, who helps manage more than $5 billion for Armada Funds in Cleveland, which holds Comcast debt.

Comcast Class A shares have fallen 17 percent in the past year, compared with a 45 percent drop for the Bloomberg Cable Stock Index, which tracks six of the largest U.S. cable companies.

Roberts says the AT&T Broadband purchase may generate cash flow at "the fastest rate our company has ever experienced."

In early February, he gathered 3,500 former AT&T Broadband workers on the USS Hornet, a retired aircraft carrier museum in Alameda, Calif. The rally, was part of a marketing effort to replace the AT&T Broadband name and unveil television commercials featuring cyclist Lance Armstrong.

"This is the time for our company to step on the gas pedal," Roberts told the group. "We can pull ahead."

Right now, AT&T Broadband is lagging behind. The unit lost 560,000 subscribers in the 12 months ended in September, largely because it lacked cash to offer such services as digital cable and high-speed Internet.

"The problem of subscriber erosion has to stop," said Wayne Wilbanks, chief investment officer at Wilbanks Smith & Thomas Asset Management, which holds 400,000 Comcast shares among its $1 billion in assets. "We expect to see a slowing down next quarter and a reversal by the end of this year."

The company said last week that it expects cash flow, which it defines as earnings before interest, taxes, depreciation and amortization, from cable operations to rise at least 27 percent to $6.2 billion this year. Comcast had forecast 20 percent growth. Cable revenue will rise by a high single-digit percentage, the company said.

In the latest quarter, revenue from the combined cable operations rose 11 percent to $4.15 billion. Comcast's cable revenue rose 12 percent to $1.6 billion, while AT&T revenue grew 10 percent to $2.5 billion. The Comcast systems have about 8.5 million subscribers, compared with about 13 million for the former AT&T unit.

The company's cash flow from cable operations rose 10 percent to $1.05 billion. Excluding costs related to the merger, Comcast's cable cash flow rose 14 percent to $655 million, while AT&T's rose 2.8 percent to $533 million.

The combined company won't generate free cash flow, or cash from operations after deducting interest, capital expenditures and certain other costs, for a year as it spends more than $2 billion to rebuild the AT&T systems. Investors rely on that measure because it shows how much money is available to pay down debt, buy back stock and make investments.

Roberts says paying down Comcast's $30 billion in debt is a priority. Comcast can trim $5 billion this year through a combination of stock and asset sales, including $3.6 billion in proceeds from dissolving a cable and programming partnership with AOL Time Warner Inc., executives have said.

Comcast, whose credit rating is one level above junk, and Cox Communications Inc. are the only two large U.S. cable companies with investment-grade debt. A Comcast downgrade would make it difficult to refinance at least $8 billion in bank debt and $6.8 billion in bonds maturing in 2004 through 2008, UBS Warburg analyst Aryeh Bourkoff said.

Analysts say a combination of cost cuts and revenue growth may propel Comcast to generate more than $1.5 billion in free cash flow next year, another way Roberts can reduce debt. The company can eliminate 5,300 positions, which would save as much as $500 million a year, Warner wrote in her report. Comcast already has cut 1,700 AT&T management jobs.

Comcast, with about 21.4 million subscribers, also can wield its size, almost double that of No. 2 Time Warner Cable, to extract discounts from companies that supply programming and equipment, analysts said.

In an interview with Bloomberg News before completing the acquisition in November, Roberts said he wouldn't set a deadline for turning around AT&T's cable business.

"This is not about making predictions but about execution," he said at the company's headquarters in downtown Philadelphia. "We're going to go as fast as we can."

The question is whether Roberts's push will be fast enough for investors.

"As time goes on, they will be asked tougher and tougher questions," Armada's Cole said.