Excite Unstrings Chello Venture

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Excite@Home Corp.last week said it scrapped a pending joint venture with Chello Broadband N.V., whose corporate parent, UnitedGlobalCom Inc., owns cable MSO United Pan-Europe Communications N.V. (UPC).

The deal-which would have combined the Asia/Pacific and European assets of Excite@Home with those of Chello-was scotched after UGC indicated it was unable to move ahead with the transaction as planned due to unfavorable market conditions, Excite@Home said.

UPC and UPG were no longer in position to close the deal under its original terms and had forwarded alternative proposals, Excite@Home chief financial officer Mark McEachen said during a conference call last Monday. McEachen said those proposals were considered and subsequently rejected because the deal was no longer in the best interests of Excite@Home shareholders, customers and overseas joint-venture partners.

McEachen said his company was "free to pursue other deals without restriction" and there were no fees connected to the breakup with Chello.

UGC spokesman Jim Carlson countered Excite@Home's market-conditions claim and said the deal was terminated due to its complexity and because "business issues" surfaced that the two companies couldn't reconcile.

Carlson also denied the move was connected to UPC's stated plans to reduce its capital expenditures budget for 2001, as was cited in a research note from UBS Warburg LLC high-yield analyst Aryeh Bourkoff.

"[Excite@Home is] a portal company and that's their direction, and UPC is an access company," Carlson said. "As the two sides sat down to discuss the merger and what the new entity would be involved in, that's when businesses issues [surfaced]."

Under terms of the original deal, Chello and Excite@Home planned to merge their international operations, to each invest $93.6 million in the combined company and to plot plans for a public offering early next year. The newly forged Excite Chello division would have touted a broadband footprint covering 15 countries.

Liberty Media Group had also agreed to invest about $187 million in the combined entity. Though the deal with Excite@Home was scrapped, "Liberty remains enthusiastic and supportive about Chello and related media opportunities in Europe," chairman John Malone said in a press release.

When asked if the Liberty investment in Chello could be in jeopardy, UGC spokesman Jim Carlson said it was still on track. "We expect it to be taken care of," he said.

Analysts said the deal's disintegration would have both positive and negative effects for Excite@Home.

"I think it's a setback internationally for [Excite@Home] to pull the plug with the Excite Chello service," The Carmel Group vice president Sean Badding said. "But at the same time, it's a plus in terms of trying to focus on and hammer down issues internally in the U.S., where they really need to expand before they can work effectively abroad."

Badding said Excite@Home faces some domestic challenges, such as bandwidth, cost issues and its sagging stock price, which hit a new 52-week low at $5.375 during intraday trading Dec. 6.

Still, Excite@Home-with an international base of 175,000 subscribers at the end of the third quarter-said overseas expansion would remain a "key element" of its business. The company said it was confident it could achieve that even in the absence of a deal with Chello.

Chello, meanwhile, loses access to Excite@Home's wide range of content and its leverage with AT&T Broadband and other major U.S. MSOs, Badding said.

But not all could be lost if market conditions improve. "It's not a permanent break from the relationship, I think. Excite@Home could retie these strings with Chello down the road," Badding said.

McEachen agreed, and noted that Excite@Home does not feel pressure to run out and do another deal, but could partner with UPC again in the future.

Domestically, meanwhile, the "inevitable" open-access issue will continue to take center stage for Excite@Home, which continues to explore ways to provide backbone support to other ISPs, said company chairman and CEO George Bell. He noted that it could take a year to 18 months to sort out the technical issues involved in providing multiple ISP access over cable lines.

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