The story behind how Excite@Home shut down its network and temporarily stranded AT&T's broadband subscribers is a tale of bondholders' reluctance to cut their losses, according to sources familiar with the negotiations. While details remain sketchy, those involved all agree that the negotiations were a mess.
When AT&T offered $307 million for the assets of Excite@Home last October, it was seen as a slam-dunk because AT&T already had a controlling interest in the cable-modem Net access provider. Indeed, some investors, customers and creditors claimed the chummy relationship between the two companies resulted in a sweetheart deal for AT&T.
Some bondholders, most of which were in the "sub-debt" category, balked and decided to force AT&T to raise its bid. Because these creditors were lower in the bankruptcy court pecking order, they stood to gain little, if any, money from AT&T's bid.
According to sources, these bondholders hoped AT&T would boost its bid closer to the $700 million to $800 million range, even though publicly they were saying Excite@Home was worth at least $1 billion. If Ma Bell approximately doubled its bid for Excite@Home, these creditors would recoup 20 cents for every dollar owed, sources said.
But AT&T wouldn't budge.
"Excite@Home's biggest mistake was believing that none of its partners could migrate to another network quickly," said one Wall Street analyst who didn't want to be named. "They screwed up by thinking AT&T would blink."
What the bondholders didn't anticipate was that Ma Bell would say just days later that it could migrate customers to its own network within a week. AT&T began transferring all 850,000 former Excite@Home subscribers to the AT&T Broadband Internet network on Saturday and expects to complete the job by Friday.
Meanwhile, Cox Communications, Comcast, Charter Communications and Rogers Cable signed "provisional" agreements Monday to retain the Excite@Home service. The three-month contracts are meant to last only until the cable companies can switch customers to their own networks.
AT&T's move, as well as the swift migration of more than half of Excite@Home's customers to independent networks, dramatically hastens the dismantling of the former Internet powerhouse.
As first reported by CNET News.com, AT&T informed Excite@Home CEO Patti Hart late Monday afternoon that it would rescind its bid. Excite@Home will move into a "transitioning" phase and distribute its assets to cable companies, a source close to Excite@Home said.
Ironically, the unraveling was accelerated by the demands of the bondholders.
To get AT&T to up its bid, bondholders forced their demands in court. Arguing that Excite@Home was losing $6 million per week, they said the service should be shut down or the company should be allowed to renegotiate its contracts at higher rates.
The bondholders got what they wanted. A bankruptcy court judge on Friday gave Excite@Home the right to shut down the service for cable companies that refused to renegotiate their contracts.
"Bondholders got what they wanted and it was scary," said the source.
According to analysts and those close to the talks, Excite@Home was pushing AT&T to bid $40 per subscriber for the high-speed ISP's assets. AT&T wanted to pay $15 to $20 and argued that it would have to pick up Excite@Home's outstanding liabilities.
Wall Street analysts say AT&T's first offer was "reasonable," but noted that Ma Bell would have increased its bid if the talks didn't deteriorate at such a rapid clip.
If AT&T had won Excite@Home's assets, it could have turned around and negotiated deals with cable partners such as Cox and Comcast. AT&T's leverage would have largely depended on Excite@Home's partners and their ability to transition customers to their own networks.
According to observers, AT&T most likely wasn't going to reap a windfall by buying Excite@Home and negotiating with its partners. By the time the bankruptcy closed, it's likely that Cox and Comcast would have completed their own cable access networks, analysts said.
Excite@Home, however, did land $160 million each from Cox and Comcast to keep service running. While the amount is larger than AT&T's first bid, analysts note that the sum isn't all that it's cracked up to be. For starters, Excite@Home still has to burn cash to keep its service running whereas AT&T would have ended the cash burn with its bid. As of last week, Excite@Home was losing about $6 million each week.
"At best, the Cox and Comcast cash puts bondholders at par with the AT&T bid," said a source that sat in on some of the negotiations. "You have to hand it to AT&T--they played it right."
Of course, the fun may just be starting. Those involved with the Excite@Home debacle expect a lawsuit of some sort against AT&T. And if Excite@Home does liquidate as is expected, AT&T could re-enter the picture.
"AT&T could come in after it's all over and buy the assets in liquidation for $25 million or so," said a source. "Could you imagine that?"