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Comcast-Disney Doubters Abound

Comcast Corp. astounded the financial world with its offer for The Walt Disney Co., yet the cable television giant now faces a daunting task in selling the blockbuster combination — and investors have already indicated the proposed price is too meager.

Analysts said Disney board members and the financial community are both looking for extremely sound reasons, beyond financial and management abilities, why Comcast believes the acquisition would work.

"Therefore, while there could be merits in combining content with distribution, we do not believe these are overwhelming, as we have seen with a company such as Time Warner which has yet to really show the inherent benefit of marrying content and distribution," Jill Krutik, an analyst at Citigroup Smith Barney wrote in a note Wednesday.

Moreover, two days of meetings between Disney executives and financial analysts at Walt Disney World are likely to reinforce the idea that Disney is on the right track and that Comcast management have yet to offer enough specifics on what they would do differently, some analysts said.

"Looking more closely, the numbers aren't there," said Harold Vogel of Vogel Capital Management, who is attending the analyst meeting, which began Wednesday and was overshadowed by Comcast's bombshell.

Vogel said Disney managers are making progress toward key goals, including improving the ratings at its ABC Television network.

Combining content, such as Disney's ESPN network, with distribution, like Comcast's cable subscribers and high-speed Internet customers, could make sense, but Disney has shown it is able to find customers for its content without owning its own cable system or satellite television network.

Disney executives are saying little about the offer, but have begun to outline its plans for boosting the company's earnings by double digits each year through 2007.

Chief executive Michael Eisner said the Disney board met Wednesday and asked management to perform an in-depth analysis of the proposal so the board could evaluate it. Eisner did not say how long the analysis would take.

Wednesday night, Dick Cook, chairman of the Walt Disney Studios, told analysts he was confident the studio would be able to produce popular animation for the big screen and home videos even after Pixar Animation Studios ends its Disney deal in 2005.

Talks between Disney and Pixar recently ended, with Pixar saying it would find another partner after delivering two more films on its contract to Disney.

Cook said low-cost animated videos, such as the recent "Lion King 1½," are enormously profitable. He also said that Disney's 2003 live action slate produced a return on investment of more than 25 percent.

Cook said the studio is planning two sequels to last year's hit "Pirates of the Caribbean," as well as animated sequels to movies such as "Lilo & Stitch" and "Bambi."

Disney also released strong first quarter earnings on Wednesday, which executives said was evidence the decisions made over the past few years by management are paying off.

The controversy over Eisner's leadership is not likely to disappear, however, as Comcast is expected to sweeten its offer and ex-Disney board members Stanley Gold and Roy E. Disney continue their fight to oust Eisner.

The two picked up some support in their effort to persuade shareholders to reject the election of four directors at the company's March 3 annual shareholders meeting.

Institutional Shareholder Services, an influential shareholder group, on Wednesday recommended against Eisner's re-election to the Disney board, citing "blurred" lines between the board and management.

Disney found the recommendation "inexplicable and unjustified with respect to Michael Eisner, since he led the very changes that resulted in a board dominated by independent directors," the company said in a statement.

Under the merger plan, Comcast said it would issue 0.78 of a share of its Class A stock for each Disney share, and Disney shareholders would retain 42 percent of the combined company. The offer valued each Disney share at $26.49, a 10 percent premium over their closing price Tuesday.

That's a relatively small premium for a takeover offer, but Comcast may be counting on the fact that other potential suitors in the media industry would surely face tougher regulatory scrutiny in Washington. Most of Comcast's holdings are in cable TV systems, while Disney's are in broadcast, cable and "content" businesses like movie studios.

Still, as Matt Andrejzcak of CBS.Marketwatch.com reports, the Justice Department's antitrust cops, the likely candidates to review the transaction, and Congress are expected to scrutinize the deal as the wave of consolidation in the media and entertainment industries rolls on.

Michael Powell, head of the FCC, said at a congressional hearing that "a merger of that magnitude will unquestionably go through the finest filter at the commission, I can assure you, as possible."

In a sign that investors expect an extended fight, Disney's shares shot up $3.52, or 15 percent to $27.60 in very heavy trading on the New York Stock Exchange, above Comcast's current offer.

Disney and Comcast together had $45 billion in revenues last year. If a deal is reached to combine the companies, they would edge out Time Warner, which had $39.6 billion in revenues last year, atop the heap of media and communications companies.

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