Excite@Home torn by AT&T, bondholders

Bondholders have split from other creditors vying for the remains of the once high-flying company, pressing for more than four times the current bid, according to sources familiar with their demands. The group is owed more than $750 million in long-term debt and stands to lose almost all of it under AT&T's proposal.

On Friday, the bondholders filed a motion with the bankruptcy court, asking it to compel Excite@Home to reject its contracts with cable companies.

The order would ask Excite@Home to tell the cable companies that it will suspend service promptly if those companies don't either enter into new contracts that will provide enough money to pay Excite's debts, or agree to buy Excite for enough to pay the creditors in full, said Martin Bienenstock of Weil Gotshal & Manges in New York, attorney for bondholders.

"It's a conventional use of the bankruptcy code for a company to reject its bad contracts and to negotiate better ones," he said. "That's exactly what this company should be doing."

The court on Friday heard objections to the current price. Bondholders are also seeking interviews with AT&T and Excite@Home management to find out how they arrived at the company's valuation.

"The (bondholders) committee is going to be taking its own steps" to raise the company's price, Kenneth Brown, an attorney for a committee representing bondholders, said in court. "We don't take these steps lightly."

It's unclear what those next steps might be, although sources have said that bondholders could exert some leverage on AT&T, threatening to push for a network shutdown if the price isn't raised, or could seek to have the company continue to run independently. Less likely would be a sale to another party, such as Microsoft or EarthLink.

For now, it's a game of brinksmanship.

"The two parties are playing the extremes right now," said a source close to the dealings. "AT&T is lowballing, and Weil (Weil Gotshal & Manges) wants par, but AT&T isn't blinking."

The source said the most likely outcome is that AT&T will estimate how much extended litigation would cost and will settle somewhere in the middle, if at all.

In any case, AT&T has all the leverage. "After all, it's not like anyone is coming in to give a better deal to Excite@Home bondholders," the source said.

Excite@Home filed for bankruptcy protection Oct. 1 and simultaneously announced an agreement to sell its high-speed Internet assets to AT&T for $307 million. The company said it would "wind down" its Excite content division if no buyers emerged.

But the price, for a company with more than 3 million subscribers and close to $1.3 billion in outstanding debt, almost immediately sparked controversy.

Those creditors who were first in line to be paid back went to court to lock up whatever assets they could, succeeding enough that the company announced Oct. 10 that it would have to stop signing up new customers. Desperate to keep a service co-branded in their names operating in ordinary fashion, cable companies AT&T, Cox Communications and Comcast agreed to help the company restart sign-ups.

In court Friday, an Excite@Home attorney said the company had increased the amount it charges cable companies for operating the Net service, immediately adding $50 million to the company's cash balance.

Since the announcement of that deal, however, the bondholders that hold the vast majority of the company's long-term debt have sought to up the price or find a new buyer.

The way AT&T and the other cable companies scrambled to keep the service running without break this week is a clear sign that more money should be on the table, they say.

"If that's any indication of how valuable the asset is, anyone can put one and one together," one bondholder source said.

The creditors are seeking a valuation that would be higher than Excite@Home's near-$1.3 billion debt, or more than four times what AT&T has already offered, sources say.

An attorney for Excite@Home said bondholders had not cited a specific value but in letters indicated they wanted a number high enough to cover the company's complete debt.

Bondholder sources said they were comparing the company's valuation to two other deals struck this month. High Speed Access, a smaller broadband Internet company, was sold to Charter Communications for $81 million. SBC Communications also agreed to buy Prodigy Communications, an Internet service provider that has recently focused on high-speed Net access, for $465 million.

Creditors have hired financial advisory firm Conway Del Genio Gries to settle on an independent valuation of Excite@Home's assets based on this kind of market comparison.

Creditors are also seeking to depose Excite@Home's board of directors, the company's CEO Patti Hart and even AT&T chief executive C. Michael Armstrong as a way to ascertain whether AT&T's original bid was too low.

"This thing reeks," a bondholder source said.

Staff writers Margaret Kane and Larry Dignan contributed to this report.