A bankruptcy court judge approves $355 million in contracts between the high-speed Internet provider and its cable partners.
Under the agreements with Cox Communications, Comcast, Mediacom and other cable companies, Excite@Home will receive $355 million to maintain the service through February and help switch customers from Excite@Home's network to the cable companies' own networks.
Judge Thomas Carlson delayed approving the agreements last week to allow bondholders more time to evaluate releases of claims that Excite@Home may waive in exchange for the transition contracts.
On Tuesday, the parties agreed that the contracts were "fair and reasonable," said Suzzanne Uhland, an attorney with O'Melveny & Myers representing Excite@Home in bankruptcy court. She acknowledged that Excite@Home's proposed $307 million asset sale to AT&T would have been more lucrative and simpler, but AT&T bailed out, leaving Excite@Home with few options.
"It will provide great value to the estate nonetheless, and there is not a better offer on the table," Uhland said of the contracts.
Cable partners praised the deal. They see the contracts as provisionary agreements that will allow them to build their own networks over the next three months. Then they'll transfer millions of customers to their independent networks.
"Today's ruling is a win for our customers because their access to @Home e-mail and the Internet will remain uninterrupted throughout the seamless transition from @Home to our new Comcast High-Speed Internet network," said Comcast Cable President Steve Burke. "Our ability to add new subscribers also remains uninterrupted."
The short-term contracts also spell the end of Redwood City, Calif.-based Excite@Home, which less than two weeks ago had 4.1 million customers and controlled the network for 45 percent of Americans with broadband Internet access at home. But on Nov. 30, Carlson ruled that Excite@Home could renegotiate contracts with its cable partners--a move that the cable partners warned could result in termination of agreements.
Only hours after the original contracts expired at midnight on Nov. 30, negotiations between Excite@Home and AT&T broke down. AT&T, which controls a 79 percent voting interest in Excite@Home, pulled its 850,000 customers from the @Home network and began switching them to the AT&T Broadband Internet network. AT&T subscribers were immediately without broadband connections, and many still suffer with slow connections or disrupted service.
Days later, AT&T withdrew its $307 million bid for the company's assets. That move prompted Excite@Home to distribute its assets among cable partners and decide to wind down operations by Feb. 28.
Attorneys estimate that Excite@Home will spend $150 million over the next three months to maintain service to customers, based on the size of its operations. That would leave an estimated $205 million for creditors and bondholders. The company also has roughly $200 million in cash.
Sparring match among creditors
The dissolution of Excite@Home--once among the largest and most promising Internet companies--has also prompted a bitter sparring match among bondholders, unsecured creditors and equipment leasing companies. Each of those groups say that Excite@Home owes them millions of dollars.
On Tuesday, the creditors turned their anger toward Chicago-based financial advisers Houlihan Lokey Howard & Zukin. The groups insist that Houlihan Lokey's contract with Excite@Home--which includes a $200,000 monthly fee and an unspecified "success fee"--should be nullified, given the company's dwindling fortunes.
William Weintraub, an attorney representing a bondholders committee, said Houlihan Lokey's recommendation that Excite@Home sell its assets to AT&T for $307 million was the "wrong transaction." Weintraub also said he'd prefer his clients' adviser, PricewaterhouseCoopers, because Houlihan Lokey was charging an "astronomical rate that's totally inappropriate."
Most important, Weintraub and attorneys for other creditors wanted a strike clause in Houlihan Lokey's contract that gave the firm indemnity--a legal, binding exemption from liability for damages. Weintraub said bondholders may decide to sue Houlihan Lokey for "bad advice," and he didn't want the firm to be immune to the lawsuit.
After a brief break, the judge ruled in favor of the bondholders and creditors. Carlson called the indemnification clause "inappropriate" and "uncommon."
"I don't believe they are customary...and they're not at all common in this district," Carlson said. "I cannot recall approving one, ever."
Richard Chesley, an attorney for Houlihan Lokey, said the firm is entitled to its generous compensation because it worked hard to hammer out the AT&T deal, and it wasn't necessarily Houlihan Lokey's fault that AT&T backed out. He also noted that Houlihan Lokey, which agreed to work for Excite@Home in August, assumed significant risk in becoming the financial adviser to a company that was headed toward bankruptcy.
Excite@Home filed for bankruptcy in late September, and the company attorney admitted in court Tuesday that its financial situation was akin to a "melting ice cube" as its cash reserves and customer list withered.
Carlson didn't require Excite@Home to get rid of Houlihan Lokey, nor did he impose PricewaterhouseCoopers as the new adviser. He said Houlihan Lokey was entitled to "reasonable compensation," but he said it was out of his jurisdiction to craft a new contract between Houlihan Lokey and Excite@Home.
He added that it wouldn't be unreasonable for Excite@Home to change the contract with Houlihan Lokey, given that "this case is going in a very different direction" than when the firm began providing financial advice in August.
Bondholders and creditors are not the only groups trying to wring money out of Excite@Home. Last week, leasing companies and computer equipment manufacturers also tried to renegotiate contracts and get as much money as possible out of the withering broadband provider.
The judge said he would hear arguments on Jan. 4 from companies that extended leases to Excite@Home, including Cisco Systems, Dell Computer and IBM. IBM attorneys who listened to Tuesday's proceedings on the phone said that Excite@Home owed IBM at least $7.5 million in cash or returned equipment. That's nearly as much as the $8 million Excite@Home estimated that it owed all leasing equipment companies in previous courtroom testimony.
AT&T attorneys were also listening to the proceedings via conference call. They said that Excite@Home still owes AT&T an unspecified amount of money or the return of some property.
The assertion sparked quiet laughter and some rolling of the eyes among creditor attorneys in the courtroom, in part because AT&T is likely to be at the center of another bondholder lawsuit. Bondholders say that AT&T breached its fiduciary responsibility throughout its long and tortured relationship with Excite@Home.
Final chapter in ugly drama
Excite@Home remains one of the most high-profile and strained marriages of the Old and New Economies, with AT&T owning the majority of Excite@Home's outstanding stock. Both companies share several board members--and executives at both companies have been vocal in their disdain for those at the other company.
Basking Ridge, N.J.-based AT&T, which inherited its @Home stake and board representation from its acquisition of cable TV leader Tele-Communications Inc., opposed the very creation of Excite@Home.
AT&T had been a shareholder in the cable company for only a few months before its directors voted to acquire Excite--a second-tier Internet portal whose dot-com culture contrasted starkly with Ma Bell's conservative sensibilities.
Frustration with former Excite@Home CEO Tom Jermoluk became clear at a meeting in March 1999 in the boardroom of AT&T's headquarters in New York, when several directors suggested spinning off Excite as a separate company--essentially undoing the merger only two months after the deal had closed. Clashes between Jermoluk and then-AT&T cable chief Leo Hindery, who adamantly opposed the merger, are legendary among executives at both companies.
AT&T wasn't the only problem Excite@Home had to face. Since its inception, it has operated under an awkward ownership and governance structure that included significant input from three major cable operators: AT&T, Cox and Comcast. As a result of the complicated ownership structure, Excite@Home has appeared unfocused and divided. More bickering between AT&T Chief Executive C. Michael Armstrong and Hindery over the direction Excite@Home should take--and the role content should play--left the access provider adrift among the big cable operators' vast assets.
Boardroom divisiveness escalated in March 2000, when Ma Bell assumed majority control of Excite@Home's board of directors and offered to buy the stakes of co-partners Comcast and Cox. At that point, AT&T had a 23 percent ownership stake in Excite@Home and a 74 percent voting stake.
In January, AT&T traded $2.9 billion in its stock for the ownership stakes that competing cable operators Cox and Comcast held. That deal boosted AT&T's stake to 38 percent. AT&T also took a 79 percent voting interest in the broadband Net access company.
Some insiders say AT&T's heavy stake in the company compromised the board's decision-making abilities and took the focus away from Excite@Home shareholders.
Some Excite@Home insiders blame the company's plight squarely on cultural clashes between AT&T's "cable guys" and Excite@Home's more informal, younger executives. In fact, Excite@Home's September bankruptcy filing was part of a deal with AT&T. The agreement called for Excite@Home to become wholly owned by the long-distance giant by early 2002, pending approval by the bankruptcy court.
At the time of the bankruptcy filing, AT&T said that it will use Excite@Home's assets as the core of a larger broadband network. AT&T insisted customers would not experience an interruption in service.
"AT&T remains committed to working with Excite@Home's management and the bankruptcy court to provide uninterrupted high-speed cable Internet service to existing Excite@Home customers, as well as continuing relationships with other cable companies to ensure seamless service to their customers on the @Home network," the company said in a statement on Oct. 1.