News

AT&T Deals a Way Out of Excite 'Put' Costs

5/27/2001 8:00 PM Eastern

AT&T Corp. said it would issue 75 million shares to Cox Communications Inc. and 80 million shares to Comcast Corp. as part of a revised agreement tied to the cable operators' stakes in Excite@Home Corp.

Cox and Comcast had the right to put their shares of Excite@Home to AT&T for $48 per share. In January, the two MSOs agreed to accept AT&T stock worth about $2.9 billion for the put rights, rather than cash.

At the time, AT&T agreed to issue about 134 million shares of its stock in exchange for about 60.4 million Excite@Home shares. But in April, AT&T said it would renegotiate that agreement, which could result in Cox and Comcast receiving more AT&T and Excite@Home shares.

With the latest agreement, both Comcast and Cox will retain their Excite@Home stakes and receive stock worth about $3.4 billion. AT&T said it finalized the Cox transaction May 18 and expects to complete the Comcast transaction in June.

"This offers AT&T financial benefits, specifically tax benefits," said AT&T spokeswoman Eileen Connolly.

AT&T, looking to increase its control of Excite@Home, engineered a deal in March 2000 with Cox and Comcast whereby the two MSOs would surrender their voting control of the high-speed data provider. In exchange, AT&T agreed to buy the MSOs' Excite@Home stock for $48 per share.

But what looked like a good deal then — when Excite@Home stock was trading at $37.69 per share — soon turned sour for AT&T, as Excite's stock price plummeted.

The March 2000 deal sent many analysts into a tizzy. They pointed out that AT&T's debt service was already heavy, and that tacking on another $3 billion in obligations to Cox and Comcast could only hurt AT&T's financial picture.

At the time, AT&T was carrying about $65 billion in debt. Since then, the company has pared about $17 billion of that burden, mainly through asset sales.

When AT&T later revised the deal to include only AT&T stock — not cash, as in the original agreement — most analysts saw it as a benefit to Cox and Comcast, because they would exchange a less liquid stock for a highly liquid and undervalued security in AT&T. AT&T's benefit would have stemmed from not having to shell out a substantial amount of cash.

But as the deadline for its planned breakup into four separate units drew near, AT&T approached both Cox and Comcast to revise the deal, sources said.

Both Cox and Comcast still give up their voting rights for the Excite@Home shares. AT&T will have 74-percent voting control and a 23- percent economic stake in Excite@Home.

The AT&T stock Cox and Comcast receive will be subject to a typical registration rights agreement. While there are no formal lock-up periods or other restrictions on the sale of the AT&T stock, both MSOs agreed that when they do sell AT&T stock, they will proceed in an orderly fashion and not dump a large number of shares on the open market at once.

Industry observers believe taxes were the prime motivator for AT&T's move.

Had AT&T accepted Excite@Home stock, the entire transaction would have been tax-free to all parties involved. By not accepting Excite@Home shares, AT&T can take a $3.4-billion loss on the deal, which works out to a $1.2-billion tax benefit for the long-distance giant.

Although Cox and Comcast will have to pay taxes on the deal, the extra AT&T shares should make up for that.

UBS Warburg cable analyst Tom Eagan said the additional 21 million AT&T shares that Cox and Comcast will receive as part of the revised deal represents about $700 million in incremental value for the two MSOs.

"It was a way for AT&T, Cox and Comcast to benefit from some tax savings that AT&T was able to garner," he said.

As a result of the revised deal, Cox and Comcast will be counted among AT&T's 10 largest institutional shareholders.

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