Comcast’s AT&T Broadband Bid Could Provoke Moody’s Downgrade

The ratings agency could place the firm into junk territory if it is forced to up the ante.
Ed ZwirnJuly 9, 2001

Comcast Corporation could see its credit rating go down if it is forced to up the ante on its $58 billion offer to buy AT&T Broadband, Moody’s Investors Service said today.

The unsolicited offer, which was announced today, would have the Philadelphia-based Comcast give 1.0525 billion of its common stock, worth about $44.5 billion, and assume about $13.5 billion of AT&T Broadband debt, in a transaction that would create the largest cable company in the United States, nearly double the size of its closest peer, Time Warner Cable.

While the company’s “current credit metrics” are strong enough to probably sustain the Baa3 rating held by the parent corporation’s senior unsecured debt and the Baa2 held by its Comcast Cable Communications subsidiary, the ratings agency expressed concern about the firm’s prospects in the event it should be forced to increase its bid for the AT&T operation.

The current ratings are already the lowest Moody’s assigns in the investment-grade range.

“Should the offer it has made be accepted substantially in the form that has been presented, and if Moody’s gains comfort that Comcast can replicate its past successful integration efforts, including improvements in AT&T Broadband’s operating statistics, it is unlikely that the acquisition would have a materially negative impact on Comcast’s prospective consolidated debt-to-cashflow leverage and other credit metrics,” the announcement stated. “Under those circumstances, confirmation of Comcast ratings would have a reasonable outcome.”

On the other hand, the “review for possible downgrade has been initiated due to the potential for future adjustments to the offer terms, which could arise if negotiations between Comcast and AT&T ensue, or if any other parties decide to bid for all or part of AT&T Broadband.”

In addition, Comcast could also face difficulties in integratings its acquisition, even if it succeeds in making the purchase on favorable terms.

The target company has a “cable footprint which is currently over 150 percent larger than that of Comcast’s today,” the Moody’s release stated. The acquisition, the largest attempted to date by Comcast, has targeted synergy savings of “at least $1.25 billion annually upon the full integration of the cable operations.”

The total potential cost reduction could go as high as $2.8 billion annually, according to Moody’s.

About $11 billion of debt securities would be affected by any downgrade.