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Fitch Places Comcast's Ratings on Rating Watch Negative.

Business Editors


Fitch has placed the following ratings on Rating Watch Negative: Comcast Corporation (Comcast) `BBB' and Comcast Cable `BBB+'. This action is due to the possible negative credit implications of Comcast's announced intent to acquire AT&T Broadband, which includes AT&T's cable assets and joint venture interests. Comcast does not have a definitive acquisition agreement with AT&T. The conclusion of this issue will also affect the following credit profiles each currently rated `A-' and on Rating Watch Negative: TCI Communications, MediaOne Group and MediaOne Group of Delaware.

Should the transaction be completed, it is expected to be stock based with the assumption of $13.5 billion in debt. The initial offer does not include considerations for AT&T's stakes in Time Warner Entertainment, Rainbow Media and Cablevision, which Comcast is prepared to acquire by issuing more equity but expressed it will ultimately divest. The long-term leverage impact of the final acquisition terms will determine the ultimate credit ratings. Fitch expects that Comcast will be committed to maintaining its investment grade rating as exemplified in past acquisitions. As the current transaction is perceived, the consolidated entity would have a `BBB' credit profile. The timing of the completion of any potential transaction will also be a material consideration in any credit review due to the general strong EBITDA growth associated with cable properties and the room for EBITDA margin improvement at AT&T Broadband. It is expected that should an acquisition agreement be completed, the time frame for closing such a transaction could be lengthy due to the large amount of required franchise authority approvals. In addition, due to the hostile nature of the bid, additional bidders and/or counter-offers by AT&T could cause material changes in the terms of this offer.

This proposed transaction would create the largest cable company in the industry with approximately twice the scale of its closest Multiple System Operator (MSO) peer. The majority of AT&T Broadband's subscribers would fit well with existing Comcast subscriber clusters. This enhanced scale and clustering could lead to $2.3 billion of cost savings and synergies that would benefit both companies. Comcast believes $1.25 billion of annual cost savings are highly achievable in the near term of which approximately 35% accounts for overhead savings. This level of synergies would equate to an approximate EBITDA margin of 30%, which would appear very realistic compared to Comcast's 40% EBTIDA margin and its peers which range in the mid-30s.

Some of the challenges Comcast could face in maximizing the value potential of this proposed transaction include the improvement of AT&T Broadband's low EBITDA margin and internal subscriber growth rate relative to industry peers and substantial network modernization remaining to be completed. Additional items of concern in this transaction are the structural subordination issues and type of assumed debt by Comcast, specifically related to AT&T Broadband's significant hybrid debt position.
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Publication:Business Wire
Date:Jul 10, 2001
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