As Debtors Bang on Door, Excite Seeks New Investors

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Cash-challenged Excite@Home Corp. got some good news and bad news last week. The bad news: a pair of debtors demanded the repayment of $50 million in convertible notes by Aug. 31, and that's money the data-over-cable service provider doesn't have.

The good news: Former Clinton White House chief of staff Thomas "Mack" McLarty may be leading an investment group interested in becoming Excite@Home's "white knight."

The two funds — associated with Promethean Investment Group LLC, which holds about $100 million in Excite's convertible debt — claim the company had misrepresented its financial condition in earlier negotiations.

Excite has denied Promethean's claims, and last Thursday said it would hire additional financial advisers to look into the matter.

But while investors were mulling the possible implications of repaying the Promethean debt, reports came that McLarty — vice chairman of Kissinger McLarty Associates, a international strategic advisory company with offices in New York and Washington — was in serious discussions about investing in Excite@Home.

According to a report in The Wall Street Journal, McLarty and Ranch Kimball, a private investor and adviser to Kissinger McLarty who had previously spent 15 years with Boston Capital Group, have been talking to Excite@Home since May. The Journal
said McLarty, who is connected to several private-equity firms, was discussing taking a minority or majority stake in Excite@Home, depending on the arrangement.

Excite@Home spokeswoman Stephanie Xavier would neither confirm nor deny that talks with McLarty were ongoing.

"From a company standpoint, we consider this a rumor, and we don't comment on rumors," Xavier said.

Kissinger McLarty director Richard Klein also declined comment.

"From time to time, we advise groups looking at investment opportunities," Klein said. "It would be inappropriate to comment or speculate on prospective or contemplated plans. Kissinger McLarty Associates is an advisory firm, and this is what we do."

According to sources close to the situation, Kissinger McLarty is serving as an adviser to a group that's been talking with Excite@Home since May. However, those sources said that talks are still in the preliminary stages and there is the potential that a deal will not be done.

"They're on the 50-yard line," said one source familiar with the deal.

Kissinger McLarty was formed in 1999 after the merger of Kissinger Associates — a consultancy headed by former Secretary of State Henry Kissinger — and McLarty's own advisory firm.

Though Kissinger McLarty has several well-known business clients, including Hollinger International Inc. and American Express Corp., McLarty personally serves as an adviser to several private equity firms. Among those companies that list McLarty as an advisor are Leed Weld & Co., a New York firm that focuses on educational investments, and Washington Investment Partners LLC, a Washington-based specialist in high-tech investments.

An official at Washington Investment Partners said the firm is not involved in any discussions with Excite@Home.

But McLarty has many other contacts that might be interested in making a bid, especially in the international community.

Before entering the political arena, McLarty was a successful businessman. He was CEO of Arkla Inc., an Arkansas-based natural gas distributor that was bought by NorAm Energy Corp. in 1994. McLarty also currently serves as chairman of the McLarty Cos., a privately held automobile and transportation business which owns car dealerships and truck-leasing firms throughout Arkansas.

Excite@Home has been desperate for cash for months. In June, it landed two separate deals to bring in $185 million: the Promethean investment and a sale-leaseback of its backbone network to AT&T Corp. for $85 million. While those deals were supposed to provide enough cash to fund operations through the end of the year, Excite@Home CEO Patti Hart told investors and analysts in July that it wouldn't be enough.

Although Excite has not revealed how much money it will need, some analysts have estimated that the company will have to secure at least $200 million.

Excite continues to look at its options, including further investment from AT&T, an investment from an outside group or Chapter 11 bankruptcy protection.

Some people familiar with AT&T, which owns a 23-percent economic interest and a 74-percent voting control of Excite, said it may be leaning toward letting the high-speed Internet service provider file for bankruptcy. But one analyst said that would not be a favorable situation.

Janco Partners analyst Matt Harrigan said a bankruptcy could seriously affect customer perception of the high-speed service, a key factor in MSO revenue and cash-flow growth. He added that it is unlikely that AT&T and the other partners in Excite@Home — Cox Communications Inc. and Comcast Corp. — would be willing to risk future growth in high-speed data services.

"It's pretty amazing that AT&T hasn't already done something to fix this," Harrigan said.

COX, COMCAST TERMINATING

Also last Friday, Excite@Home said it has received notice that Cox and Comcast will terminate their exclusivity agreements with the company effective June 4, 2002.

In a research note, Harrigan said that it is unlikely that the termination — which was expected — would mean that the MSOs would drop Excite@Home.

"We still think that the costs and disruptions arising from converting customers over to new operator-owned backbones and e-mail servers or using an outside traffic carrier are substantial and make it preferable to continue a relationship with [Excite@Home]," Harrigan wrote.

Earlier in August, Excite@Home revealed that its auditors had serious doubts about its ability to continue as a going concern, mainly because of the Promethean debt. The auditors were later replaced, but not because of the report, Excite said.

According to the agreement with Promethean, the entire $100 million could come due after Excite is delisted from the NASDAQ National Market system. Excite stock, which closed at 52 cents on Aug. 30, is well below the $3 threshold for a NASDAQ listing.

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