MediaOne Board OKs AT&T; Bid

The board of MediaOne Group has agreed to AT&T;’s cash and stock offer, valued at $51.5 billion, giving other bidders five days to top the bid, sources close to AT&T; said Sunday.

AT&T; announced its unsolicited bid last month, trumping an offer from Comcast Corp. to buy MediaOne in an all-stock deal worth $45.7 billion. As part of the transaction approved Saturday, MediaOne gave other parties until Wednesday to step into the bidding and gave Comcast five days to counter any new offers.

Last week, Microsoft Corp. and America Online signed confidentiality agreements with MediaOne to enable them to join Comcast in a counter-bid or make their own offers.

Many industry analysts and executives, however, doubt that either Comcast or Microsoft will take on AT&T;, the nation’s largest long-distance provider, which stands to become the biggest cable operator if its purchase of MediaOne goes unchallenged.

Comcast, a family-owned company that is the nation’s fourth-largest cable operator, is at a disadvantage because it is half the size of MediaOne and only one-seventh the size of AT&T.; As one investment banker on the sidelines of the battle put it: “Comcast doesn’t have the capital base to compete in this fight. It is trying to play in the NFL when it’s only in Pop Warner.”

Comcast has approached Microsoft, America Online and Charter Communications about partnering in a counter-bid, according to industry sources. But analysts say that path is complicated by several factors and that Comcast should fold its hand and collect the $1.5-billion penalty fee MediaOne agreed to pay for not completing the deal. The breakup fee is worth $5 a share for Comcast stockholders.

One potential ally is Paul Allen-controlled Charter, which has been on a cable buying spree during the last year to fulfill its founder’s vision of a “wired world” where consumers get all their home entertainment, information and telecommunications services over cable wires.

Though Allen is flush with cash, he has lost several acquisitions because he lacks the stock currency that helps sellers reduce the tax burden of a sale. Sources say that joining an expensive bidding contest could jeopardize Charter’s initial public offering, planned for later this year.

Comcast’s current investor, Microsoft, which put $1 billion into the Philadelphia-based cable company two years ago, also has a mountain of cash to back a counter-bid and is eager to broaden its influence in the cable industry. Microsoft already dominates the office computing world and sees America’s living rooms as its next big frontier.

Sources say Microsoft is loath to risk upsetting AT&T;, which has promised to use its operating system in advanced cable set-top boxes being deployed later this year. While Comcast and MediaOne would give Microsoft access to roughly 9 million cable customers, AT&T; has influence over 22 million subscribers.

Furthermore, Microsoft is apparently disappointed that its initial investment in Comcast has not brought strategic benefits. While the investment set off a record rally in cable stocks that has generated a huge return for Microsoft, the partnership has fallen short of Microsoft’s hope of incorporating its WebTV browser technology into Comcast set-top boxes or its content on @Home, the high-speed cable Internet service owned and marketed by several cable partners, including Comcast.

One source close to Microsoft says executives at the company’s Redmond, Wash., headquarters commonly say they were “left at the altar” by Comcast. He says Microsoft invested in Comcast with no strings attached but many at Microsoft were annoyed and embarrassed when Comcast chief Brian Roberts went out of his way to publicize that.

One school of thought has Microsoft helping Comcast with a counter-bid to extract concessions from its partner. “This could mark a change in the relationship with Microsoft,” said Tom Eagan, a cable analyst at PaineWebber Inc.

Still, some analysts wonder whether the end justifies the means. “Does AOL or Microsoft really want to contribute $20 or $30 billion for a minority stake in a cable company that will reach only a small fraction of American households?” the investment banker said. “The only thing Comcast can do through a counter-bid is to make AT&T; pay more because Mike Armstrong wants this deal badly.”

Armstrong, AT&T;’s chief executive, wants to offer U.S. households telephone, TV and Internet services over cable wires, which would bypass the local phone companies that charge stiff switching fees for connecting AT&T; customers.

MediaOne would give AT&T; access to about half of the nation’s 65 million cable homes. And some analysts say AT&T; needs MediaOne to help offset the poor economics of the cable systems it bought in March from Tele-Communications Inc.

While MediaOne’s systems have been largely upgraded to deliver two-way services and are concentrated in densely populated urban areas that are easy to service, TCI’s customers are largely in small cities and rural areas that are costlier to upgrade and maintain. Partly because of this, TCI trails the rest of the industry in being able to offer two-way services.

Perhaps the most serious threat to AT&T;’s bid for MediaOne comes from AOL. The nation’s largest online service is cable’s No.1 enemy because of its campaign in Washington for equal access to the high-speed networks that cost the cable industry billions of dollars to rebuild.

AOL covets the high-speed cable pathway that would allow its 18 million Internet subscribers to surf the Web faster and easier. Analysts say AOL launched its war on cable in large part because of its fear of being unable to compete against such high-speed services as @Home and Roadrunner, owned by cable operators.

AOL has signed alliances with local phone companies that are rolling out their own high-speed connections and has held discussions with satellite television services such as DirecTV. But cable operators may well be the lowest-cost provider because of their ability to bundle a host of services for customers.

A bid by AOL for MediaOne would give the online company only 5 million cable customers but an important wedge into the business. Its market value is nearly as high as AT&T;’s, but analysts doubt that MediaOne would consider its stock as secure as that of the telecom giant. What’s more, it has only $4 billion in cash, not nearly enough to match AT&T;’s bid, which includes $20 billion in cash.