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We've seen consolidations and breakups. Now we have witnessed a consolidation that could lead to a breakup.
The announcement that Comcast Corp. and Cox Communications Inc. will trade in their Excite@Home stock for AT&T Corp. stock on the one hand may dissolve an often stormy joint ownership for the high-speed cable modem service. But armed with AT&T stock, Cox and Comcast may now have an opening to snatch up cable systems owned by AT&T Broadband if it is spun off as a separate company as planned.
The stock trade was made possible by a reorganization deal struck in March, when Cox and Comcast gained the right to sell 60 million shares total of Excite@Home stock to AT&T. Transaction value is estimated at $2.9 billion, with the final price tag determined by an average share price during a 30-day period that started in mid-December.
AT&T's stock in the high-speed service will rise from 23 percent to 38 percent, and its voting interest will increase to 79 percent.
What seems to fascinate industry analysts is the form the transaction took-a stock swap rather than a cash payment plan or transfer of cable subscribers.
"If anything there really is a doomsday proposition for the Excite@ Home stock," says Michael Harris, president of the analyst firm Kinetic Strategies Inc. "If there is anything here it is AT&T that got them to take the stock."
Fellow analyst Matthew Harrigan of Janco Partners agrees, noting the March agreement calls for a minimum $48-per-share stock price, which contrasts with Excite@Home's recent trading rate in the $8 to $9 range. AT&T Corp.'s stock, meanwhile, is trading in the mid-$20 range, making it "fairly amazing they chose to use their stock for currency."
"The most interesting thing is AT&T used the stock in the first leg of this transaction even though it is a very depressed currency," Harrigan adds.
The transaction gives Excite@Home a consolidated-and possibly more tranquil-ownership. There have been reports of friction between Excite@Home, Comcast and Cox over service problems and rollout strategies.
Cablevision Communication Corp. is also a part-owner on the exit ramp. The New York-based MSO has been feuding with Excite@Home, claiming it was left out of the March reorganization deal. The two have traded suits in a Delaware court, and after months of wrangling the MSO is close to exiting the consortium and selling off its 5 percent interest.
Although it signed an affiliate agreement, Cablevision had offered Excite@Home service only in a limited promotion, with the bulk of its cable modem customers using its own Optimum Online brand. A spokeswoman for Cablevision says the final details are still being worked out, but at present the MSO is no longer using Excite@Home systems.
But Cox and Comcast may not make a full break from Excite@Home and create their own branded cable modem services.
"The issue is do you really want to hop out of @Home, where you get 65 percent of the revenue and then try to build a backbone and install equipment for your own service?" Harrigan asks. "The answer is something the companies will continue to look at over time, but it is not something we will see at one particular point."
Harris, however, does see more of a possibility Cox and Comcast could evolve their own services, particularly as the industry moves toward an era of cable open access for multiple ISPs. Rather than take control of all cable modem customers in their territories, the two MSOs might opt to start up their own service with new customers, and offer upgrades to existing customers to make the switch, he points out. Excite@Home "would then be competing with them," he says.
Cox and Comcast may also have created an opportunity to gain territory if AT&T Corp. goes ahead with an announced plan to spin off AT&T Broadband as a separate IPO. If the IPO plan allows the two MSOs to convert their main AT&T stock into AT&T Broadband stock, they could leverage that interest and snap up AT&T Broadband cable systems.
"Certainly Cox and Comcast might look at ways to leverage equity with AT&T Broadband. But there are a lot of ways to do that," Harris says. He adds he has heard this rumor increasingly, and at the very least "it offers a place holder for certain."
Harrigan, however, cautions that it all depends on the IPO plan.
"There could be a further step where they could swap their plain vanilla T shares for broadband, but you don't know yet how many lawyers will be involved," he says.
Harrigan adds there are also rumors afloat Comcast could be interested in buying all of AT&T Broadband's cable systems outright. Although that might run the third-largest cable MSO into trouble with the same subscriber caps that hampered the AT&T Broadband-MediaOne Group merger, he maintains, "that's a possibility."
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