Who Controls @Home?AT & T, After MSOs Deal

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Easing the uncertainty surrounding the future of Excite@Home Corp., AT & T Corp. forged a deal that puts it firmly in control of the high-speed data-over-cable service.

The deal simplifies the voting structure of Excite@Home, increasing AT & T' s voting control to 74 percent from 56 percent and eliminating the veto power of Excite@Home' s other cable partners-Comcast Corp. and Cox Communications Inc.

Cox and Comcast also agreed to give up their Excite@Home board seats, and they can sell their respective stakes in Excite@Home to AT & T for up to $3 billion.

"This agreement removes a lot of the uncertainty, gives clarity in terms of governance and reconfirms our commitment for opening the cable infrastructure," AT & T chairman C. Michael Armstrong said in a conference call with reporters.

Through the deal, AT & T gets what it has desired ever since it gained a 25 percent ownership stake in Excite@Home through its purchase of @Home cofounder Tele-Communications Inc. last March: final say in the future direction of the high-speed-data provider.

AT & T also moves forward with its initiative to open up its broadband network to other providers and to appease regulators who are concerned about open access.

And the move adds to the likelihood that AT & T will divest its stake in rival data-over-cable service Road Runner once its deal to acquire MediaOne Group Inc. is completed. MediaOne owns a 38 percent stake in Road Runner through its participation in Time Warner Entertainment.

Armstrong would not comment on AT & T' s plans for Road Runner.

Excite@Home should also benefit from some perceived stability after its exclusivity agreements with the cable partners expire in 2002.

AT & T agreed to extend its distribution pact with Excite@Home by six years through 2008, and Cox and Comcast extended their agreements by four years through 2006.

Cox and Comcast will also receive warrants to purchase two shares of Excite@Home series-A common stock for each home their systems pass. Those warrants would not become fully vested until 2006.

And the deal offers Cox and Comcast the opportunity to cancel their exclusivity agreements with Excite@Home-which are slated to expire in 2002-earlier than that. However, both MSOs are heavily incented not to cancel those agreements prematurely.

"If we feel it is in Cox' s best interest to terminate exclusivity, we have the right to do so," Cox executive vice president of business development David Woodrow said in the conference call. "But as a consequence, there would be penalties. We would have to forfeit the right to exercise the warrants. We have no plans to do that."

Excite@Home also gets access to AT & T' s "WorldNet" dial-up Internet service, advanced television services and wireless services.

Armstrong said Excite@Home and WorldNet would work closely together in keeping with AT & T' s strategy to offer "any-speed" Internet access. "We hope to offer our consumers high-speed, medium-speed and low-speed and to be able to let them pay for what they get and upgrade them as they go," he added.

Banc of America Securities LLC analyst Doug Shapiro said the agreement stabilizes Excite@Home' s stock-which has been under fire during the past several months-and opens up a whole new market for the company.

"This positions Excite@Home to pursue a wholesale model and better leverages its infrastructure," Shapiro said.

"AT & T is going to try to extend its backbone into fixed wireless and mobile wireless and the TV and narrowband," he added. "Because of AT & T' s telecom mentality-by that, I mean how do they maximize the utilization of their pipe-[Excite@Home] is going to focus on a wholesale model. This is an asset that is well underleveraged. There is a lot of value to be extracted."

The wholesale model-selling access over the Excite@Home network to Internet-service providers-would still have to be negotiated through the individual cable companies, but it could prove to be a lucrative revenue stream for Excite@Home.

"Post-exclusivity, the business model will expand for us in several ways," Excite@Home president George Bell said. "The platform we built, deployed and scaled becomes a business opportunity not only used by our cable partners, but also offered-hopefully, with scale-to third-party ISPs."

Bell added that the deal would make Excite@Home a better negotiator with content providers.

"Being clear about where we go over the next six to eight years allows us to think about longer-term relationships with content partners," Bell said. "They now know that we have the distribution opportunities over a long period of time to assist them in their goals."

The deal also alleviates investor fears that concern Excite@Home' s relationship with AT & T. Prior to this arrangement, investors were concerned that if nothing was done to extend Excite@Home' s cable-distribution agreements after exclusivity expired, it could simply disappear.

The result has been a significant drop in Excite@Home' s share price almost from the day AT & T took over. Last April-one month after AT & T closed its purchase of TCI-Excite@Home stock was trading at $91 per share. But the stock steadily declined: It dropped to about $40 in June, and it has hovered in the $30- to $40-per-share range ever since.

Investors still appear a bit skittish on the stock-after a small lift of about $3 per share on the day after the announcement, it closed at $33.18 March 30, down $4.50.

Shapiro believes the stock will eventually rebound. "I think the stock has established a floor here," he said.

Although the jury is still out with the investment community, Comcast and Cox come out of the deal smelling like roses. Aside from the put options that would require AT & T to pay $48 per share for their Excite@Home stock, both operators gain the public-relations benefit of embracing open access to their infrastructure.

It also ends what was at times a contentious relationship between the board members.

Numerous reports over the past several months have characterized Excite@Home board meetings as tense at best, with Comcast, Cox and AT & T at loggerheads concerning the the high-speed-data service' s direction.

Although the parties involved would not characterize the new relationship as an acknowledgment of those past differences, they at least admitted that Excite@Home will be able to make decisions much more quickly.

"We clearly had a variety of agenda issues that have often been reported in the press," Woodrow said. "This takes a lot of those issues off the table."

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