Investors were bracing for a long battle between Comcast Corp. and rival AT&T Broadband — a surprise offer that could potentially create the world's largest TV cable operator.
Comcast — currently the nation's third largest cable operator — on Sunday made an unexpected $44.5 billion stock offer to acquire larger rival AT&T Broadband, even as AT&T Corp. insisted the unit was not for sale.
Such a purchase would create the world's largest TV cable operator with 22 million subscribers, nearly twice the size of No. 2 U.S. cable operator AOL Time Warner Inc.
AT&T, the No. 1 U.S. long-distance telephone company, made it clear it has no plans to sell its broadband cable unit. Instead, it aims to proceed with plans to spin off the business — through the launch of a tracking stock later this year and a formal separation next year.
But analysts don't see Comcast going away.
``They (Comcast) have been lusting after (AT&T) Broadband for a while,'' said one arbitrager who declined to be named.
``Ultimately, the answer may depend on how much pressure the largest institutional shareholders exert on AT&T's board,'' said Banc of America Securities analyst Douglas Shapiro.
On Monday, Comcast tried to rally investor support for its plan.
At a meeting with analysts, Comcast said it would be better able to manage the assets of AT&T Broadband to create a market leader with broad geographic reach and better profit margins. Comcast said it made the offer for AT&T Broadband, the industry leader, after months of negotiations with AT&T had failed.
The bid comes as AT&T dismantles more than $100 billion in acquisitions to create separate companies for its broadband, wireless, and consumer and business telephone operations. Earlier on Monday, AT&T Wireless Group Inc. became an independent company — the first step in AT&T's restructuring plan.
Although rumors of a takeover offer had loomed for months, shares of Comcast fell $3.39, or 8 percent, to $38.89 in heavy trading on Nasdaq due to concerns that buying AT&T Broadband would hurt Comcast's earnings and that such a deal would face intense regulatory scrutiny, analysts said.
Shares of AT&T gained $1.97, or almost 12 percent, to $18.69 in heavy trading on the New York Stock Exchange.
Comcast officials told analysts that buying AT&T Broadband would cut its earnings by 1 percent to 4 percent in the first year, but add 2.5 percent to 5 percent to earnings in the second year.
Investors also fear Comcast may need to sweeten its offer to convince AT&T to sell the unit rather than proceed with its plan to spin off the business, analysts and investors said.
``The purchase price I'm pretty sure may be renegotiated a little higher because AT&T spent $100 billion to acquire those assets. The Comcast offer may be a little light,'' said Brian Slater, a portfolio manager for Condor Capital in Martinsville, N.J.
Even at a higher price, ``we think it's a great long-term opportunity for Comcast — it catapults them into the leading role in the industry. They'd be able to sell off overlapping assets and benefit from refinancing the debt,'' Slater said.
AT&T said it would evaluate the Comcast offer and respond in due course. AT&T Broadband was assembled through AT&T's acquisition of Tele-Communications Inc. and MediaOne Group, which it wrested away from Comcast in a takeover battle.
AT&T said in a statement, ``We recently had some informal conversations with Comcast at their request. However, those conversations never led to any concrete proposals and there is no truth to the rumor that we agreed on valuation or reached an impasse over so-called `social issues.'''
Some executives close to the situation said Comcast and AT&T had held merger discussions off and on since November, but talks ended in recent weeks after AT&T's board objected to issues such as voting structure, management control, and the location of the combined companies' headquarters. Other sources close to the situation said the discussions never progressed beyond the preliminary stage.
``From the AT&T shareholder's perspective, there are only two questions that the board needs to answer to make a decision on Comcast's offer: Is the price fair, and which management team is more likely to deliver margin improvements?'' Sanford Bernstein analysts said in a research report.
Sanford Bernstein said the Comcast offer appeared fairly valued, ``even assuming a 20 percent downdraft'' in Comcast's stock price.
It said it had recently been impressed with the ability of AT&T Broadband's management to expand the cable telephony operations but had not seen any financial results consistent with the margin improvement promises made by management.
The Associated Press and Reuters contributed to this report.