The hostile takeover bid for Disney [NYSE: DIS] by cable TV industry giant Comcast [Nasdaq: CMCSA] could create an entertainment and multichannel video service behemoth that would intensify the competitive pressure faced by satellite TV operators.

If Comcast succeeds in uniting with Disney, look out. The combined company would possess Comcast’s cable TV distribution capabilities in all of the nation’s 25 largest markets and Disney’s powerhouse programming and entertainment content that includes ABC, ESPN, movie studios and theme parks.

Comcast is no stranger to blockbuster deals. It completed a $50.8 billion acquisition of AT&T Broadband in November 2002 that formed the largest cable TV service in the country with 21 million video subscribers in 41 states. The deal included 6.3 million digital video customers, 3.3 million high-speed data customers, and 1.3 million cable phone subscribers. Together, the operations of both companies in 2003 amassed $45 billion in annual revenues, $10 billion in EBITDA (earnings before interest, taxes, depreciation and amortization), and $125 million in market capitalization. The 2003 revenues of both companies would exceed the $39.6 billion in 2003 revenues attained by Time Warner [NYSE: TWX]- currently the world’s largest entertainment and communications company.

A merger of the largest U.S. cable TV operator and the entertainment world’s most valuable brand name would have important implications for DirecTV and EchoStar Communications [Nasdaq: DISH]. DirecTV and EchoStar must beware of Comcast and Disney uniting as a potential juggernaut that would possess, in the words of Comcast, “an unparalleled distribution platform and an extraordinary portfolio of content assets.” The new company would propel broadband forward, expand current services and launch new ones, Comcast officials said.

Brian Roberts, president and CEO of Comcast, cited regulatory approval of News Corp’s [NYSE: NWS] acquisition of Hughes Electronics [NYSE: HS] and its DirecTV unit as reason to think federal regulators also would okay a Comcast-Disney union.

“We have analyzed the issues associated with regulatory approval and are confident that all necessary approvals can be obtained in a timely fashion,” Roberts said. “Given the landscape that has evolved in our industry over the past few years, the creation of integrated content and distribution companies is essential to increasing the level of competition.”

Roberts further claimed that the existing program access and program carriage rules of the Federal Communications Commission (FCC) ensures that the combined company will continue to make all of its satellite-delivered national and regional cable networks available on a non-exclusive, non-discriminatory basis. There also will be no discrimination against unaffiliated programming services, similar to a condition accepted by News Corp in its recent acquisition of DirecTV.

“We have a wonderful opportunity to create a company that combines distribution and content in a way that is far stronger and more valuable than either Disney or Comcast can be standing alone,” Roberts said. The initial offer from Comcast is for a tax-free stock-for-stock merger in which it would issue 0.78 of a share of its Class A voting common stock for each share of Disney. The valuation offered a $5 billion-plus premium for Disney shareholders at the time Comcast announced its intentions. However, Disney’s price quickly rose, as investors seemed to anticipate that a sweetened offer or higher bids from others ultimately would be presented.

Comcast’s proposal last week valued Disney at $66 billion, including the assumption of $11.9 billion in debt, offering a multiple of approximately 14 times Disney’s expected 2004 EBITDA.

Comcast, the country’s largest high speed Internet service provider with over 5 million subscribers, should not be underestimated. Its holdings include majority ownership of Comcast Spectacor, Comcast SportsNet, E! Entertainment Television, Style Network, The Golf Channel, and Outdoor Life Network. Comcast also was just half the size of AT&T Broadband when those companies merged 15 months ago. The combination coincided with a reversal of basic subscriber losses and quickened system upgrades, as well as significant launches of new products and services such as video-on-demand and HDTV, Comcast officials boasted last week.

A Comcast-Disney merger would create a company with competition-stifling market power, argued Chuck Hewitt, a former president of the Satellite Broadcasting and Communications Association (SBCA). Hewitt, who now heads the Severna Park, Md.-based Charles C. Hewitt & Associates satellite consulting firm, said Comcast has abused its power in the past to the detriment of the satellite industry.

Comcast’s Clout

In one glaring example, Comcast has refused to provide programming of its Philadelphia sports teams to satellite TV services, Hewitt said. The move subverted language in the 1992 Cable Act that called for equal access, price, terms and conditions for the satellite industry to receive any programming in which a cable company possessed at least 5 percent ownership, he added.

However, the rule contained a loophole that specified the programming needed to be satellite-delivered, Hewitt said. Comcast stopped distributing the programming via satellite and opted for terrestrial transmission to avoid having to comply with the intent of the 1992 Cable Act, he explained.

“Comcast will do anything it can to have a competitive advantage,” Hewitt said. “If it grows larger, it would have enormous power. As demonstrated by its history, it is willing to do whatever it can to have a marketplace advantage, one way or another.”

Steve Blum, a satellite-broadcasting consultant who heads Marina, Calif.-based Tellus Venture Associates, said he believed it would be unprecedented for a cable TV operator to own one of the three big U.S. TV broadcasting networks. “It’s an interesting situation,” said Blum.

A publicly released letter from Comcast to Disney Chairman and CEO Michael Eisner said that Eisner had rejected a private overture to discuss a merger. However, Disney indicated last Wednesday when the bid was revealed that its board would assess the proposal and then respond.

Despite Comcast’s prediction that a merger with Disney would win U.S. government approval, Blum warned of potential regulatory resistance. “Cable is regulated differently than satellite TV,” Blum said. For example, cable companies operate in local markets, whereas satellite TV services are primarily national. Regulators may not view the News Corp purchase of Hughes as comparable with a Comcast acquisition of Disney, he said.

Blum also questioned what a cable company, such as Comcast, would bring to an alliance with Disney. “I don’t see Comcast having the magic bullet to fix Disney,” he said. Although Disney has not performed particularly well in recent years, Comcast would seem to have little to offer, he added.

Comcast Cable President Steve Burke, a former Disney executive, said last week that improved management could rectify the problems that have caused Disney to underperform. However, Disney reported improved first quarter results last week.

Disney still has a “tremendous brand” but the company has accomplished little in the last few years, Blum said.

“I don’t think News Corp or EchoStar will necessarily do anything” in response to the news about Comcast’s hostile bid for Disney, Blum said. Indeed, neither DirecTV nor EchoStar offered any reaction to the news. –Paul Dykewicz

(D’Arcy Rudnay, Comcast, 215/981-8582; Bob Marsocci, DirecTV, 310/726-4656; Chuck Hewitt, Charles E. Hewitt & Associates, 410/544-4108; Steve Blum, Tellus Venture Associates, 831/582-0700)