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Mixed Reaction to Comcast's Offer for Disney

Thursday, 12 February 2004 12:00 AM

Analysts said Disney board members and the financial community were looking for extremely sound reasons, beyond financial and management abilities, why Comcast believes the acquisition would work.

"Therefore, while there could be merits in combining content with distribution, we do not believe these are overwhelming, as we have seen with a company such as Time Warner which has yet to really show the inherent benefit of marrying content and distribution," Jill Krutik, an analyst at Citigroup Smith Barney, wrote in a note Wednesday.

Moreover, two days of meetings between Disney executives and financial analysts at Walt Disney World are likely to reinforce the idea that Disney is on the right track and that Comcast management have yet to offer enough specifics on what they would do differently, some analysts said.

"Looking more closely, the numbers aren't there," said Harold Vogel of Vogel Capital Management, who is attending the analyst meeting, which began Wednesday and was overshadowed by Comcast's bombshell.

Vogel said Disney managers were making progress toward key goals, including improving the ratings at its ABC Television network.

Combining content, such as Disney's ESPN, with distribution, such as Comcast's cable subscribers and high-speed Internet customers, could make sense, but Disney has shown it is able to find customers for its content without owning its own cable system or satellite television network.

Disney executives are saying little about the offer, but have begun to outline its plans for boosting the company's earnings by double digits each year through 2007.

Chief executive Michael Eisner said the Disney board met Wednesday and asked management to perform an in-depth analysis of the proposal so the board could evaluate it. Eisner did not say how long the analysis would take.

Wednesday night, Dick Cook, chairman of Walt Disney Studios, told analysts he was confident the studio would be able to produce popular animation for the big screen and home videos even after Pixar Animation Studios ends its deal with Disney in 2005.

Talks between Disney and Pixar recently ended, with Pixar saying it would find another partner after delivering two more films on its contract to Disney.

Cook said low-cost animated videos, such as the recent "Lion King 1 1/2," were enormously profitable. He said that Disney's 2003 live action slate produced a return on investment of more than 25 percent.

Cook said the studio was planning two sequels to last year's hit "Pirates of the Caribbean," as well as animated sequels to movies such as "Lilo & Stitch" and "Bambi."

Disney released strong first quarter earnings on Wednesday, which executives said was evidence the decisions made over the past few years by management were paying off.

The controversy over Eisner's leadership is not likely to disappear, however, as Comcast is expected to sweeten its offer and ex-Disney board members Stanley Gold and Roy E. Disney continue their fight to oust Eisner.

The two picked up some support in their effort to persuade shareholders to reject the election of four directors at the company's March 3 annual shareholders meeting.

Institutional Shareholder Services, an influential shareholder group, on Wednesday recommended against Eisner's re-election to the Disney board, citing "blurred" lines between the board and management.

Disney found the recommendation "inexplicable and unjustified with respect to Michael Eisner, since he led the very changes that resulted in a board dominated by independent directors," the company said in a statement.

Under the merger plan, Comcast said it would issue 0.78 of a share of its Class A stock for each Disney share, and Disney shareholders would retain 42 percent of the combined company. The offer valued each Disney share at $26.49, a 10 percent premium over their closing price Tuesday.

That's a relatively small premium for a takeover offer, but Comcast might be counting on the fact that other potential suitors in the media industry would surely face tougher regulatory scrutiny in Washington. Most of Comcast's holdings are in cable TV systems, whereas Disney's are in broadcast, cable and "content" businesses such as movie studios.

In a sign that investors expect an extended fight, Disney's shares shot up $3.52, or 15 percent to $27.60 in very heavy trading on the New York Stock Exchange, above Comcast's offer.

Disney and Comcast together had $45 billion in revenues last year. If a deal is reached to combine the companies, they would edge out Time Warner, which had $39.6 billion in revenues last year, atop the heap of media and communications companies.


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Analysts said Disney board members and the financial community were looking for extremely sound reasons, beyond financial and management abilities, why Comcast believes the acquisition would work. "Therefore, while there could be merits in combining content with...
Thursday, 12 February 2004 12:00 AM
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