A major institutional bondholder told CNET News.com on Monday afternoon that the creditors' case will hinge on evidence that AT&T lied or mislead Excite@Home stakeholders throughout the bankruptcy proceedings. Creditors insist that AT&T maintained its $307 million bid simply to buy time while the telecommunications giant prepared its own network to pick up 850,000 former Excite@Home customers.
"We haven't filed a suit or anything yet, but we will," said one large institutional bondholder who requested anonymity. "AT&T basically breached their fiduciary responsibility to creditors and shareholders...They basically tried to screw the company. They planned this all months ago."
Representatives for AT&T could not immediately be reached for comment.
Plans for the lawsuit come only hours after AT&T, which has a 79 percent voting interest in Excite@Home, officially rescinded its original offer to purchase Excite@Home's cable assets.
As first reported by CNET News.com, AT&T confirmed Tuesday that it had pulled out of its $307 million bid. AT&T spokeswoman Eileen Connolly said that AT&T executives informed Excite@Home CEO Patti Hart about the bailout late Monday afternoon.
The lawsuit, which the bondholder source said is likely to be filed this week, would also cap a tortured history between Excite@Home's bondholders and the cable companies. Bondholders and creditors strive to maximize the return on their investment, while the cable companies want to minimize the cost of acquiring millions of Excite@Home customers, who pay an average of $46 per month for high-speed Internet access.
Judge's decision changes everything
The Redwood City, Calif.-based high-speed Internet provider filed for Chapter 11 bankruptcy protection on Oct. 1. As part of the deal, AT&T agreed to buy its assets for $307 million.
Almost immediately after Excite@Home filed for bankruptcy, bondholders, unsecured creditors and even some shareholders reacted in anger. They said that the company's assets, which included an optical network and a customer list of 4.1 million people, were worth as much as $1 billion.
But on Friday, a bankruptcy court judge ruled that Excite@Home could renegotiate contracts with its cable partners. For weeks preceding the ruling, the cable companies, including AT&T, Cox Communications, Comcast, Mediacom and others, threatened that such a decision would force them to break the contracts altogether and transfer customers to their own networks.
After contracts expired on Friday at midnight, negotiations between AT&T and Excite@Home broke down. Excite@home terminated service to 850,000 AT&T customers, and AT&T scrambled to get those customers switched to the AT&T Broadband Internet network as quickly as possible.
Like other cable companies, AT&T had been preparing its own network to handle a deluge of new accounts in case Excite@Home collapsed. For weeks, AT&T engineers have been working around the clock so that customers could be switched to AT&T service without disrupting their Internet connections for more than a few days.
As of Tuesday evening, only days after Excite@Home terminated service to AT&T, AT&T said it had transferred about 80 percent of its 850,000 stranded customers to its own AT&T Broadband Internet system. AT&T expects to transfer the remaining customers by the end of the week--far sooner than the two weeks the company had been predicting as recently as last week.
Meanwhile, cable partners are forging provisional deals with Excite@Home that will also result in the transfer of millions of customers to independent cable networks. Cox, Comcast, Mediacom, Rogers and other cable companies have all signed three-month deals, during which time Excite@Home will provide service until the cable companies absorb the customers or find them new Internet service providers (ISPs).
The bid's demise, combined with the short-term nature of the cable company contracts, essentially dooms Excite@Home--one of the brightest stars of the late 1990s Internet stock boom. A source close to the company said Monday that it was moving into a "transitioning" phase, during which time the cable companies will assume Excite@Home's assets.
Playing a game of chicken
Although the bondholders say they have reason to be angry at AT&T's withdrawal, they may also be to blame in the Excite@Home morass.
According to numerous sources close to Excite@Home and AT&T, Excite@Home creditors engaged in a dangerous game of chicken with AT&T. They underestimated Ma Bell's resolve and its ability to move customers to its own network, so they lost the game.
The contracts that Excite@Home and the cable companies have negotiated since Saturday require them to pay Excite@Home $355 million for three months of service to customers. Bondholders and other unsecured creditors will receive whatever remains of that $355 million when the company finally folds.
The contracts are worth $48 million more than AT&T's original offer. But the contracts still don't deliver fair returns to the creditors, the bondholder said. They will likely decide in the next several days whether to approve the contracts.
"At the end of the day, there's value for the bondholders. It's just not as much as we thought if AT&T had come up with a higher bid. We did OK," the source said.
A bankruptcy court judge must approve the contracts within 20 days.