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Excite@Home may get help from AT&T

Aug 27, 2001  •  Post A Comment

AT&T Corp. is prepared to provide a technical safety net for Excite@Home Corp. if it files for bankruptcy to ensure uninterrupted third-party Internet service to its 3.8 million subscribers in AT&T Broadband, Cox Communications and Comcast Corp. cable systems.
But there is a good chance that the future management and ownership of Excite@Home could become a major talking point in any revitalized talks about Comcast’s stymied offer to acquire AT&T Broadband, sources say.
The Internet service provider, which was the brainchild of cable pioneer John Malone and was ahead of its time when it was launched nearly a decade ago, last week gave outward indications that it was hobbling along on a $185 million cash infusion, $85 million of which came from AT&T. Sources close to Mr. Malone and his Liberty Media Group say they are not currently inclined to get involved in the Excite@Home debacle.
Excite@Home declined comment on whether it will file for Chapter 11 bankruptcy protection after it fired Ernst & Young after the auditors filed an addendum to the company’s annual report stating there is “substantial doubt” the company can survive as is. It sent Excite@Home’s battered stock plummeting 46 percent.
Analysts say Excite@Home needs to raise another $100 million to $200 million to cover ongoing costs. Excite@Home also could seek to sell off its Excite media business, analysts said. However, some analysts say the company could burn through those cash reserves in record time, and that the media business could cost more to close than to operate at a loss. If its stock is delisted, Excite@Home also would incur the cost of having to pay back a recent convertible bond issue and other debt.
“The company has a very real risk of running out of cash,” said Henry Blodget, analyst at Merrill Lynch.
In a bankruptcy, AT&T could invest more funds in Excite@Home while being protected from lenders and having to assume only a minimal portion of the company’s outstanding $1.5 billion debt.
AT&T can easily assume much of the infrastructure operations of Excite@Home in the case it goes bankrupt. AT&T already provides network and backbone services in a lease-back arrangement. Excite@Home owns or controls the content and servers. Comcast bills its 1 million Excite@ Home subscribers and Cox bills its own 800,000 Excite@Home subscribers. AT&T has the largest portion with 2 million Excite@Home subscribers and an Internet service provider business valued at about $750 million, based on AT&T’s 23 percent economic interest and 74 percent voting interest in the company.
AT&T recently spent $775 million (offset by $740 million in tax credits) to buy out Excite@Home partners Comcast and Cox under a previous agreement that valued Excite@Home stock at around $40 a share. The company’s stock last week traded between 10 cents and 75 cents per share, which put it at risk of being delisted from the NASDAQ exchange.
If Excite@Home goes bankrupt, AT&T must ensure service to its own subscribers to protect its economic interest and to Comcast subscribers (under an agreement Comcast secured before it bid $58 billion for AT&T Broadband). AT&T and Comcast declined comment.
However, sources close to the situation say the standoff between AT&T and Comcast over Comcast’s unsolicited bid for the broadband unit may soon take a new twist.
AT&T is in serious discussions with The Walt Disney Co. about a multi-pronged pact that would give Disney a stake in an AT&T Broadband tracking stock spinoff in exchange for a new retransmission agreement to carry its ESPN, Disney Channel and new Family Channel in addition to receiving several new digital channel positions for future services. Electronic Media has learned the stake would be 5 percent and could involve the exchange of $2 billion to $5 billion in cash.
Still, that’s a far cry from the $40 billion to $50 billion investment bankers figure AT&T Broadband would be valued as a standalone unit.
The AT&T Board of Directors may well reject the efforts of AT&T Chairman Michael Armstrong to effect a Disney partnership instead of an outright sale of the broadband unit on the grounds that shareholders don’t have nearly as much assured gain. Mr. Armstrong has until Labor Day to come up with a counterbid or game plan that would persuade the AT&T board not to enter negotiations with Comcast.
As for Excite@Home firing its auditors, it turns out the company’s hiring of PricewaterhouseCoopers as its new auditors (they’re also AT&T’s auditors) was approved by its board of directors in May and disclosed in an SEC filing in June. The hiring became effective Aug. 15, the day after Ernst & Young’s pessimistic filing.