Excite@Home bondholders, who are collectively owed more than $750 million, are bitterly opposing AT&T's attempt to buy the broadband Internet access business for just $307 million. They say that AT&T, which controlled Excite@Home before the deal, may be trying to give itself a sweetheart deal.
They've asked for permission to start a legal discovery process aimed at getting as much information as possible about how AT&T valued Excite@Home before bidding. As part of that process, they want rights to interview Armstrong, AT&T Chief Financial Officer Charles Noski and other top executives who served on Excite@Home's board of directors.
AT&T had tried to block much of the request, asking that it not be forced to provide internal documents or its top executives. Nevertheless, Judge Thomas Carlson granted much of the creditors' request Tuesday, an attorney for the bondholders said.
"Everything they opposed is going to be provided to us," said attorney William Weintraub.
AT&T declined to comment on the litigation, offering only a general statement. "We will try to resolve this in a way that is fair to shareholders," said June Rochford, a spokeswoman for the company. "We have our bid in, and we haven't changed it."
The latest twist in Ma Bell's bid for Excite@Home's cable assets helps raise the stakes in the ongoing game of chicken, giving AT&T opponents potentially valuable new information.
A source close to the deal said that the bondholders are hoping the judge can scare AT&T into making a higher bid for Excite@Home, but the move could backfire. The bondholders are trashing the AT&T bid in public but privately hoping Ma Bell keeps the offer on the table, since there are no other credible offers, the source said.
AT&T, however, could walk away from the bid altogether, the source said. The company has informed Excite@Home that the broadband service provider breached the bid terms by telling its cable partners it would not court new subscribers. "AT&T hasn't told Excite@Home it will walk away yet," the source said. "But they've indicated that they could."
The linchpin to the AT&T bid could be Excite@Home's cable partners such as Cox Communications and Comcast. If those companies can take on their own broadband subscribers--something that might not be possible right now--AT&T could simply drop its bid, leaving creditors high and dry and forcing Excite@Home to liquidate under Chapter 7 bankruptcy.
Excite@Home declared bankruptcy Oct. 1, after long months of warning about financial troubles. At the same time, the company said it would sell its cable Internet access business, which numbers more than 3 million subscribers, to AT&T, the company's controlling shareholder.
The announcement almost immediately brought cries of protest from a number of creditors who felt that the company was worth more. Bondholders, who stand to lose the most, have been the most aggressive in saying that the AT&T price is too low and that the sale should be blocked or renegotiated.
Rochford disputed the allegation that the value was arrived at unfairly. "We did in fact hire an independent financial advisor, the Blackstone Group," she said, adding that Mufit Cinali, a former AT&T executive who sits on the Excite@Home board, was also an advisor.
The bondholders have gone so far as to petition the court to have Excite@Home reject the contracts it has with cable companies such as AT&T and Cox, essentially shutting off service to the millions of subscribers.
By forcing the cable companies to the point where they could see their customers' service shut down, the bondholders believe that AT&T or other partners will be forced to raise their bid for the cable assets. A decision on that issue has been scheduled for mid-November.
The discovery process has proved to be one of the most controversial pieces of an increasingly complicated bankruptcy.
Excite@Home has not objected to the bondholders' requests for its internal information or interviews with its executives. But attorneys for the company have begun fighting assertions that it has acted as an AT&T puppet.
The decision to sell the cable assets was made by an independent committee that did not include AT&T representatives, and AT&T did not vote on the final sale agreement, Excite@Home attorney Robert White said in bankruptcy court Monday.
"Management is entirely independent from AT&T, and will remain independent of AT&T," White said.
Armstrong, Noski, and two other senior AT&T executives left Excite@Home's board last week, as the larger company sought to reduce its direct control of the Net service provider's operations.
AT&T initially offered bondholders a junior executive in Armstrong and Noski's place. The company argued in court that forcing it to divulge all of its valuation documents relating to Excite@Home would be unfair. Because it is a buyer, and the bondholders and other creditors have taken on the roles of sellers, giving up the information would skew the negotiating process, an AT&T attorney argued in court Monday.
Carlson, the federal bankruptcy judge, did not appear to be swayed by that argument, noting that as controlling shareholder, AT&T retained a responsibility to find the best possible value for Excite@Home assets. Weintraub said that bondholders had been granted access to documents pertaining to AT&T's valuation of the company, as well as interviews with the executives.
Staff writers Larry Dignan and Tiffany Kary contributed to this report.