dotcomscoop.com
The Broadband Wars Come Home
By Steven M. Tilles, M.D.
Special to Dotcom Scoop
November 8, 2001
Never fall in love with a stock, we are told. I'll add another one to that rule from my own experience. Never fall in love with a technological breakthrough and believe that someone won't figure out how to it give away for pennies on the dollar.
The technology is cable internet access as seen by the provisioning of the last mile connection via Excite@Home, currently with 4 million subscribers, growing at 50+% per year. The company is currently in the bankruptcy courts in San Francisco. The company that wants to subsume it for pennies on the dollar is AT&T. Fortunately for AT&T, the attorneys for Excite@Home, headed by Mr. White of the firm O'Melveney et. al., seem intent to just get the deal done.
Not so fast kemosabe. Enter the bondholders. In the $307 million dollar offer by AT&T for the assets of Excite@Home, the current structure after the secured creditor, Promethean (well known in financing cirlces as the financer of last resort, for their so-called death spiral habit of shorting the stock of the companies they invest in, presumably as a hedge, gaining both as the stock falls and getting their principle paid back as a secure creditor in bankruptcy), other semi-secured or un-secure creditors, leaves as little as 3% payback for the bondholders or "noteholders", under one projection by the debtor attorneys (Excite@Home's counsel).
Obviously, as seen in bankruptcy court in San Francisco, presided over by Judge Carlson, the bondholders, represented by William Weintraub et. al. were annoyed enough with this settlement that they have threatened to seek an injunction to shut down the network (the network goes dark) and force a higher settlement. Then, the same bondholders have also requested depositions from at least 3 previous Excite@Home board of directors, all from AT&T, including C. Michael Armstrong, CEO, in an attempt to get an insider view on how the $307 million was derived.
Ironically or sadly, AT&T paid off puts to Cox and Comcast earlier this year, for their Excite@Home stock, with about $3 billion in AT&T stock, presumably giving a valuation for ATHMQ at that time of almost $20 billion (the ticker symbol for the stock previously was "ATHM", but the "Q" signifies that ATHM is in bankruptcy, and trades on the OTC bulletin board having been de-listed by the Nasdaq and removed from the Nasdaq 100 or QQQ index).
Excite@Home is still operating efficiently despite the bankruptcy proceedings. Just this last week, Comcast announced that they had added over 100,000 new Comcast@Home subscribers in the quarter. A couple of weeks ago Excite@Home announced that they would stop provisioning new subscribers, because of cash flow constraints. Suddenly, panicked MSOs (the cable companies) streamed in with new agreements and almost $100 million and provisioning of new subscribers was resumed.
In every war, their are at least two adversaries. In the broadband wars, there are numerous. For example, there is digital subscriber line (DSL) via "twisted copper" of the phone lines, from the regional bell operating companies (RBOCS), with sub-branding by Earthlink or AOL and others. Cable is offered by AT&T, Cox and Comcast and numerous others in the U.S. via the @Home network. Rogers and Shaw in Canada are the biggest in Canada, similarly operating via the @Home network.
Satellite, currently in its nascence, is only a small threat to DSL and cable. All want a piece of the broadband pie, with cable currently in the lead with about 60% market share. So, what's next? Myself and 6 other shareholders formed an executive committee representing about 300 Excite@Home shareholders internationally. This group includes talented people from every corner of the country. We are diverse in our abilities and strong in our committment. Our motto as stated by our originator, Mike Katto, is "we shall never surrender." We communicate as a group through a club site on Yahoo!. We have legal agreements and have raised funds from the group in order to hire legal representation. Our attorney, David Replogle, an experienced bankruptcy attorney in San Francisco, is currently attending the bankruptcy hearings.
We haved tried, in vain so far, to gain the imprimatur of the court as a "shareholder committee" so that we might directly be involved in the discussions for a reorganization of the company.
Our group already has a reorganization plan showing how the company will have strong positive cash flow in 2002 and should earn, in preliminary estimates, about $40 million next year or 10 cents/share. This requires a true reorganization and includes selling or shuttering the money-losing Excite portal, caught in the down-draft of a steep decline in advertising and media spending. Other current expenditures including lease-holds will require severing those leases or new terms. Creditors can be paid at a higher rate of return than the current AT&T offer or given stock with some dilution to the shareholders.
Similarly, the $750 odd million in bond debt can be re-structured or similarly given favorable terms for conversion to stock at a later date. This is no "pie in the sky" plan and will require investment banking and accounting validation. The attorney for the debt holder (Excite@Home's attorney), when asked by the judge, laid a bombshell on the court on Monday, October 29, and admitted that Excite@Home was currently "cash flow neutral."
As I walked out of court on Monday with our attorney, to return to my San Jose office, where I am in a group practice as a kidney specialist, or nephrologist, I shook my head in dis-belief, when I realized this was a broadband war that had only just begun.
Dr. Tilles is an Excite@Home shareholder and he currently has five computers utilizing the @Home broadband service. He is an Assistant Professor of Medicine at Stanford University and is in a group medical practice in San Jose, CA. He received a B.A. in Zoology from The University of California - Berkeley and an M.D. from UCLA. He is married and has four children. |
