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AT&T's role: Throwing good money after bad

Victim or villain? That is the key question when it comes to determining AT&T's role in the Excite@Home collapse.


AT&T's role: Throwing good money after bad

By Larry Dignan
Staff Writer, CNET
December 26, 2001, 8:00 a.m. PT

Victim or villain? That is the key question when it comes to determining AT&T's role in the Excite@Home debacle.

Yes, AT&T tried to pick up the pieces of the failed broadband provider in bankruptcy court for what many considered a pittance. And yes, AT&T did quietly build a parallel network that allowed it to yank nearly 1 million customers from Excite@Home almost overnight. And yes, AT&T does have a mixed record when it comes to dealing with smaller partners.

That said, AT&T also sank a Titanic-sized wad of money into Excite@Home.

Analysts aren't sure how much AT&T lost on its dealings with Excite@Home, but they agree it can be summed up in two simple words: a lot.

An AT&T representative said the company invested roughly $4 billion in Excite@Home from 1999 to 2001, adding that AT&T didn't sell any of its shares in Excite@Home as its market value soared to some $35 billion.

In theory, if AT&T would have been able to cash out of Excite@Home shares at the April 2000 peak, it would have at least broken even on its investment.

"They didn't get anything out of it," said Guzman analyst Patrick Comack. "A lot of companies made bad investments, but this seems to be one more glaring example."

When you look at how much money and stock AT&T had tied up with Excite@Home, it's not hard to understand why the company was reluctant to raise its bid from $307 million in bankruptcy court, said analysts. In the end, AT&T lost about $4 billion and missed out on major potential investment gains as Excite@Home eventually sank.

According to filings with the Securities and Exchange Commission, AT&T first became what was then an @Home shareholder via its acquisition of TCI in March 1999 for $55 billion. That acquisition, along with MediaOne, became AT&T Broadband.

As a bonus in the TCI deal, AT&T acquired a 40 percent stake in @Home, valued around $1 billion at the time. AT&T inherited the @Home shares, but under accounting parlance booked the value as its first investment in the company.

TCI and Kleiner Perkins Caufield & Byers founded @Home in August 1995. Prior to being acquired by AT&T, TCI made a host of investments in @Home, gobbling up preferred stock at regular intervals in transactions that totaled more than $60 million.

According to a March 1999 filing, AT&T owned 47 million shares of @Home worth more than $3.7 billion on March 31, 1999. Just a few days later, @Home shares peaked above $94, making AT&T's stake worth about $4.5 billion.

Soon after AT&T had TCI in the fold, the cable Internet venture began taking on water. By the end of the first quarter of 2000, after @Home acquired Excite, AT&T was sitting on 95 million shares of the combined company. As of March 31, 2000, AT&T's stake in Excite@Home was worth about $3.1 billion.

Through a series of complicated dealings, AT&T acquired a controlling stake in Excite@Home and gave its cable partners, Comcast and Cox Communications, the right to sell their shares to AT&T anytime between Jan. 1, 2001, and June 4, 2002, at a price of $1.4 billion and $1.5 billion, respectively, or a minimum of $48 a share.

When AT&T made the deal in March 2000, it may have believed it had an America Online killer on its hands--fat Internet pipes that would bring in subscription revenue and content from Excite that would attract advertisers. But that thinking quickly backfired when advertising money dried up and Excite@Home shares began to plummet along with dot-com stocks.

Last January, Cox and Comcast told AT&T they wanted to cash in as it became clear Excite@Home wasn't going to see $48 a share anytime soon.

AT&T decided to issue $2.9 billion worth of its own stock to buy Cox and Comcast out. When AT&T announced it would issue shares to Cox and Comcast, Excite@Home was trading at $8.71, well below the $48 mark.

Following the transaction, AT&T owned 38 percent of Excite@Home, up from 23 percent, and Comcast and Cox pocketed a nice profit. AT&T also entered an $85 million lease agreement that brought its total investment in Excite@Home to about $4 billion.

When the dealing was done, AT&T was left holding millions of shares in Excite@Home, which are likely to be worthless after the bankruptcy proceedings are finished and Excite@Home shut its doors in February.

"They lost a lot, but there are too many moving parts to be conclusive," said Comack. "All of that money and stock didn't buy them anything." 

Your turn: @Home subscribers sound offNext page

Follow the money and cable alliances as AT&T gradually consolidates control over Excite@Home.

July 11, 1997
@Home prices an initial public offering at $10.50 per share. On the company's first day of trading, shares reach $25.50.

June 24, 1998
AT&T announces a $48 billion bid for cable company Tele-Communications Inc. (TCI)

Jan. 19, 1999
@Home agrees to buy for $6.7 billion.

March 9, 1999
AT&T completes its acquisition of TCI. The deal also increases AT&T's stake in @Home to 40 percent and voting rights to 70 percent.

May 28, 1999
@Home completes its acquisition of Excite. AT&T's stake in the combined company is 26 percent, with 58 percent voting rights.

March 29, 2000
AT&T announces a plan to assume control of Excite@Home. The company agrees that Comcast and Cox Communications can sell their stakes to AT&T for a minimum of $48 per share between Jan. 1, 2001, and June 4, 2002.

Aug. 28, 2000
AT&T acquires 74 percent voting control of Excite@Home; economic stake at about 25 percent.

Jan. 12, 2001
AT&T agrees to trade $2.9 billion in stock for Cox's and Comcast's stakes in Excite@Home. AT&T now claims 38 percent of Excite@Home stock and a 79 percent voting interest.

Sept. 28, 2001
Excite@Home files for Chapter 11 bankruptcy protection. Shares in the company are expected to become worthless.

Dec. 19, 2001
AT&T Broadband and Comcast agree to merge their cable and broadband operations in a $72 billion deal.

Source: CNET