Cox, Comcast may sell Excite@Home stakes

Cox Communications and Comcast, two major cable operators and large shareholders of broadband Internet provider Excite@Home, face the decision of whether to part with their considerable stakes in the company for a pronounced premium. Jan. 1 marked the opening of an 18-month window in which to sell.

Just a few years ago, such a move would have been unthinkable. After all, Excite@Home represented an entree into the lucrative Internet and data market for a consortium of about 20 cable television providers.

But Excite@Home's depressed stock price and expectations about the coming of an era of open access--regulations that require cable operators to offer high-speed Net access via multiple providers, not just via the house brand such as Excite@Home or the Time Warner-controlled Road Runner--have changed the landscape.

Now many analysts believe Cox and Comcast are likely to sell their stakes in Excite@Home, capitalizing on a promise by AT&T to offer its partners $48 per share for the stock. Excite@Home shares are trading around $6 each.

"Common sense would say that they should sell that stock back to AT&T," said Abhi Gami, an equity research analyst at investment bank William Blair. "In the short run they should do it. It seems very black and white to me."

Others concur, surmising that the lofty stock premium and the industry's embrace of open access makes a sale likely.

"I think it's a foregone conclusion that they'll sell," said Cynthia Brumfield, president of Broadband Intelligence, an industry newsletter.

The agreement
Under an agreement with AT&T, which claims a controlling stake in Excite@Home and increased its ownership in the company last year, Comcast and Cox have the right to sell their Excite@Home stock to Ma Bell for $48 per share. The companies, under a window that opened this week, have until June 2002 to sell, if they choose.

As part of the pact, Cox and Comcast agreed to extend their relationships with Excite@Home through at least 2006--though not on an exclusive basis. Cox, Comcast and AT&T currently plan to exclusively offer Net access via Excite@Home until June 2002.

Excite@Home representatives said the $48 stock issue is separate from the company's business relationship with Cox and Comcast, which would continue.

"If they were to sell their stake, it doesn't mean that they're ending their exclusivity. It doesn't mean that they're getting out of the business. It would just mean they're managing their (stock) portfolio," said Excite@Home spokeswoman Alison Bowman.

Now AT&T is rumored to be negotiating to swap cable systems and subscribers with Cox and Comcast in lieu of cash, which could total as much as $3 billion. A spokeswoman for Comcast declined to comment. Representatives for Cox and AT&T could not be reached.

A cable swap would be attractive for Ma Bell, which already has a massive debt load.

How times change
Regardless, just a few years ago the idea of Comcast and Cox selling their stakes in Excite@Home would have been unimaginable. For one, Excite@Home offered cable operators a new revenue stream via broadband Internet access at a time when they were entirely dependent upon TV revenues but were being chastised for routinely raising rates.

In addition, the economy was humming forward and Excite@Home shares were, for a while, trading at lofty levels along with many of the leaders of the Internet economy.

But like many Internet companies, Excite@Home's stock has slumped, making a $48 per-share payday more attractive than ever.

William Blair's Gami said that if the stock were trading at closer to $40 the potential harm to the partnership and even simple tax implications would make a sale unlikely. "But when the stock's at $5, it's hard to make those arguments," he said.

Plus, some analysts believe that new open-access requirements could mean that Cox and Comcast no longer feel compelled to hold an ownership stake in Excite@Home. Most industry experts and executives believe that several ISPs will have access to the cable industry's networks, offering consumers a choice of Net access providers and the cable operators a cut of the profits from several ISPs--not just their affiliated house brands.

"Open access is coming, so there's no statement to be made about their working relationship by selling," Gami said.

Brumfield said that Cox, Comcast and even AT&T, via open access trials with other ISPs such as Juno Online Services, have made it clear that Excite@Home will not remain as an exclusive provider in the future. "The end is coming in terms of proprietary broadband service delivery," she said.

However, analysts believe Excite@Home, which has considered a strategy of offering digital subscriber lines, satellite Net access and wholesale contracts with other ISPs, is better prepared than ever for the eventual end of its exclusive era.

As for stock in Excite@Home, Gami expects a sale by Cox or Comcast "within a quarter or two" depending on the complexity of any proposed deal. For example, speculation abounds that AT&T may prefer to trade cable systems and subscribers for the stock rather than the nearly $3 billion in cash it earlier guaranteed Cox and Comcast. Any cash-and-trade deal could become complicated and take longer to negotiate, some suggest.

Brumfield said a deal may not occur immediately, but she believes that 2001 will significantly change the cable industry and broadband cable Net access.

"This is a tough time for anyone to be making any moves that they don't have to be making. But it is going to be this year that we're going to see a lot of major changes," Brumfield said. "This won't happen overnight. There will be transitions. There will be scaling back.

"It's going to be a pretty fluid and important year," she said.