Ma Bell, which has long held a controlling vote on Excite@Home's board of directors, agreed to buy Excite@Home's cable Internet access assets for $307 million on Oct. 1, the same day the company filed for bankruptcy protection. But bondholders, which hold more than $750 million in debt, are bitterly opposed to the deal, saying it badly undervalues the company.
Federal bankruptcy Judge Thomas Carlson said in court Wednesday that the bondholders' position could undermine the deal, the first time he has publicly expressed reservations about the sale's outcome.
"It's going to be very easy for them to say, 'This is our money; we don't want that sale,'" Carlson said. "Unless creditors are convinced that the AT&T purchase is beneficial...it's going to be very hard to approve the (sale) process."
Bondholders, AT&T, Excite@Home and other creditors are all in the process of hardening negotiation positions for a sale that will determine the fate of the largest high-speed ISP in the United States, with more than 3.7 million individual subscribers.
On Friday, bondholders filed a motion in court blasting the deal. They asked Excite@Home to shut off service to its cable company partners unless they could provide enough money to pay the company's debts or buy the company's broadband assets for a price that would cover its near $1.3 billion in debt. That motion, if granted, could have the effect of suspending Internet service for many or all of Excite@Home's subscribers.
AT&T said Wednesday that it was withdrawing its most influential representatives, including Chief Executive C. Michael Armstrong, from Excite@Home's board of directors. The move was done to avoid a conflict of interest in the ongoing sale, the company said.
But a source close to Excite@Home gave a different take on the situation. As part of its own negotiating tactics, Ma Bell wants to show that winning the assets isn't its highest priority, in an attempt to keep creditors' expectations under control, the source said. The decision to remove executives from Excite@Home's board was intended to signal that "we've got the B-team working on the @Home project," according to the source.
That's not a sign that AT&T is willing to give up, however.
"The creditors and AT&T have to play a game of chicken," the source close to Excite@Home said. "At the end of the day, I don't think AT&T walks away."
Attorneys for the bondholders are seeking depositions with many top AT&T executives, including Armstrong, Chief Financial Officer Charles Noski, and Executive Vice President John Petrillo. They're also looking for access to any correspondence, e-mails or document drafts that might shed light on how AT&T and Excite@Home arrived at a value on the company.
Decisions on the timing and scope of that process will likely be made Monday in court. Carlson said the inquiry would be one way AT&T and Excite@Home could satisfy their critics.
"In these cases it is a matter of whom do you trust," Carlson said. "The real function of the discovery is to convince the parties that they want to support the sale."