Creditors seek new Excite@Home deal

Redwood City, Calif.-based Excite@Home filed for bankruptcy protection last week, simultaneously announcing intentions to sell its broadband Net access business to AT&T. Basking Ridge, N.J.-based AT&T is Excite@Home's largest shareholder and has a controlling vote on its board of directors--a role that some call a conflict of interest. The company continues to serve its customers with high-speed access service as it reorganizes its business under bankruptcy protection.

Some investors say AT&T and Excite@Home crafted the deal without consulting bondholders or creditors, who hold more than $1 billion in outstanding debt. According to bankruptcy court case law, all parties of interest should approve asset sales when a company enters bankruptcy proceedings.

A committee of five large creditors, appointed by a trustee, is leading the charge to undo the AT&T deal, possibly by opening up Excite@Home's assets to an auction or keeping the company independent. This committee includes Cisco Systems Capital, MacKay Shields, Lydian Asset Management, Tickets.com and Creedon Capital Management, but it is in close contact with other large bondholders.

"From the committee's perspective, the sale doesn't work," Paul Basta, an attorney representing the five parties, said Friday in San Francisco bankruptcy court. "At the current price, the sale should probably not happen."

Bondholders say they are discussing the possibility of keeping Excite@Home an independent company concentrating on broadband Internet access. The reorganized company would shut down content operations such as the Excite.com portal, one source close to the discussions said.

Wall Street analysts say dumping the Web content side of the company could result in a viable business--despite the fact that the content side was once heralded as equal partner to the cable operations.

A source said discussions among the creditors have not yet progressed to the point of talking to potential rival buyers, but that Microsoft and EarthLink have come up as "natural" potential alternatives to AT&T.

Excite@Home, which has 3.7 million customers, was formed in January 1999 after the $6.7 billion merger of Internet portal Excite and broadband Internet access provider @Home--the largest merger of pure-play Internet companies to date. But the company soon stumbled as the two sides clashed, and it hit harder times as the advertising market withered last year.

"As we look at the company, the Excite portion of the company is not very viable and doesn't have much value to any company," said Andrew Watt, a director at Standard & Poor's. "The Excite side of the business model was in large part based on advertising...and that has completely dried up."

The future of the @Home side of the business is also cloudy, despite AT&T's $307 million bid. The committee of creditors planned to discuss the situation with Excite@Home representatives over the weekend; no final decision has been made.

An attorney for Excite@Home said the company was satisfied with the $307 million AT&T deal, but she noted that it is still working with creditors to get the best return from its assets. "We are in constant communication," said Suzzanne Uhland, an attorney representing Excite@Home. "The company has a fiduciary duty to all of its creditors."

Conflict for Ma Bell?
Creditor dissent hinges on whether AT&T overstepped legal bounds in its role as controlling shareholder and lead bidder for assets. Basta, the lawyer who represents dissenting bondholders, said the situation amounted to a "conflict of interest." Other attorneys also questioned AT&T's role.

"Clearly there is a history here of opportunistic behavior by the controlling shareholder," an attorney for Promethean Capital Group said Friday during the court proceedings.

AT&T has said that it did not participate in the vote that led to the asset sale, a determination made by an independent committee of directors advised by PricewaterhouseCoopers. An AT&T spokeswoman declined comment on the growing opposition to the deal.

Although no formal value has been put on Excite@Home's assets, including the largest high-speed Internet service in the United States, some say it greatly exceeds $307 million. They say that, if a judge allows the transaction, AT&T would pick up the assets for pennies on the dollar.

"There's a case for this to be reorganized as a standalone company," said one source. "We don't think $307 million reflects the real value of the system."

But Wall Street analysts remain skeptical that another party would bid higher than $307 million. One analyst said that "bottom feeders" had been examining the business for some time, but that no other offers had emerged.

We have a code 363
Excite@Home's bankruptcy is the latest in the Internet and telecommunications markets, which have been particularly hard hit during the economic slowdown. Exodus Communications, a provider of Web-hosting services to thousands of companies, filed for bankruptcy Sept. 26.

According to the Administrative Office of the U.S. Courts, Chapter 11 bankruptcy filings reached 10,272 in the 12-month period ended June 30--up from 9,947 a year ago. Although the jump from 2000 to 2001 was only 3 percent, the number of filings has jumped more than 18 percent since 1999.

At the heart of Excite@Home's asset sale is a relatively obscure variation of Chapter 11 bankruptcy known as code 363, in which the struggling company puts its inventory and intellectual property up for sale instead of trying to reorganize and remain independent. The variation has become popular among telecommunications companies with valuable cable infrastructure and large customer lists.

According to bankruptcy experts, assets under code 363 must be sold at a reasonable price. If Excite@Home bondholders can persuade Judge Thomas Carlson that AT&T's $307 million offer is not the fair market value, he could open the bankruptcy proceedings to other bidders.

In addition, bankrupt companies may sell items only after all parties with significant interest have blessed the deal, according to case law. Judges generally agree that the sale of assets without approval from major parties constitutes a "creeping" reorganization plan, which is not allowed under code 363.

"Any party of interest in the Excite@Home case, including bondholders, would have the right to come in and object on a number of grounds," said John Hansen, chair of the bankruptcy practice at San Francisco-based law firm Nossaman, Guthner, Elliott & Knox. "The bondholders' grounds could be that the sale has not been tested in the marketplace, or that there's been no opportunity to see if there are other buyers and it hasn't been shopped around."

It's unclear whether Carlson will put Excite@Home's assets up for auction. Code 363 sales are not simple or quick. Bankruptcy judges have sparred with creditors over problems ranging from removal of liens to regulatory approvals and taxes. A judge must coordinate the sale among parties with divergent interests, including directors, secured creditors, unsecured creditors, equity investors and competing bidders.

Clock not ticking
Even if deals go through, it's often difficult to integrate newly acquired assets. AT&T in particular has a cautious history in this area.

AT&T purchased the assets of bankrupt San Francisco-based NorthPoint Communications in April for $135 million, but Ma Bell is taking its time integrating NorthPoint's DSL technology into its own network. More than 1,500 NorthPoint co-location switches, two central data offices and other equipment have yet to generate revenue for AT&T, according to analysts.

Some telecommunications companies have moved more quickly to gain advantage in asset sales. In September, WorldCom purchased the assets of DSL provider Rhythms NetConnections for $40 million and almost immediately began collecting revenue from the deal. By contrast, AT&T cut off NorthPoint's commercial service and is going through a lengthy process of technology and market tests before starting it up again.

In any case, parties in the Excite@Home proceedings could take months to agree on a buyer and price.

"There is no set period of time for this kind of deal," said Eric Carlson, managing director of Ernst & Young Corporate Finance in Palo Alto, Calif., and an expert on asset sales during bankruptcy proceedings. "I'm working on a deal now where we've been trying to sell assets from under a bankruptcy filing for six months. It can take even longer than that."

Excite@Home may not have that much time. It could run out of operating cash in as little as two weeks. Given the urgency, the judge may expedite the asset sale. (Judges have done so if prolonged negotiations would hurt customers, as in the 1983 case of Braniff Airways.)

"In two weeks we need to understand whether AT&T or some other party is going to come in with something real," Basta said. "At that point we'll see where to go."