There are few stories more gruesome than that of At Home Corp, which enjoyed a fairy-tale start in high-speed Internet service, only to become a nightmare for most -- but not all -- shareholders.
Most bloodied is AT&T Corp, which has lost billions with its At Home stake, acquired along with cable giant Tele-Communications Inc in 1999. AT&T controls 74 percent of At Home's voting stock.
At Home's stock sank Tuesday to an all-time low of US$1.90, following the news that it borrowed US$100 million from lenders. How can this be? At Home, operating as Excite At Home, is the No. 1 provider of high-speed Internet service over cable modems. Its North American subscribers more than doubled to 2.9 million in the 12 months through March 31. The California-based company gets 35 percent of the cable-modem revenue collected by AT&T, Comcast Corp and Cox Communications Inc, which together serve 43 percent of the nation's 69 million cable-TV households.
The answer: At Home may have been distracted by its 1999 acquisition of the Web portal Excite Inc, and vexed some customers with its performance in the high-speed Internet business. Cablevision Systems Corp, for example, cited dissatisfaction with Excite At Home as a reason for not using the service in most of its systems.
This week, At Home said Cox and Comcast are ending their exclusive relationship with Excite At Home in December. Analysts expect the two big cable companies to negotiate lower fees in the future. At Home's business model changed at the very time the company ran low on cash and advertising plummeted for its Excite Web portal.
Frederick Moran, an analyst at Jefferies & Co, lowered his target price for the company from US$4 to US$2 on Wednesday. In a glum report, Moran said he expects that the company will need a cash infusion of US$61 million next year.
Fifteen months ago, At Home's business looked so promising that AT&T granted Comcast and Cox a put option to sell their At Home shares to AT&T at a price of US$48 at any time between Jan. 1, 2001 and June 4, 2002.
By the time Comcast and Cox exercised their put on Jan. 11, At Home was a US$7 stock. In May, AT&T sought to make the best of the fiasco by renegotiating the deal as a taxable transaction, in order to get a tax break. AT&T wound up paying US$3.43 billion in stock to Comcast and Cox, without accepting their At Home shares.
By not increasing its 23 percent equity stake in the troubled company, AT&T avoids the risk of larger charges for At Home. In the first quarter, AT&T took a US$739 million charge related to the Internet service company.
Comcast and Cox, meanwhile, are recording windfalls.
Cox, which invested US$7.3 million in At Home five years ago, received 75 million shares of AT&T stock last month. Comcast, which made a similar investment in At Home, received 80 million AT&T shares this month. By Comcast's calculation, it will have a US$1.1 billion profit even after paying about US$600 million in taxes on the transaction.
And by ending their exclusive arrangements with At Home, Comcast and Cox presumably may negotiate more favorable terms with At Home or other Internet service providers, such as Earthlink Inc or AOL Time Warner Inc.
Some investors expect to see Comcast and Cox reduce the payment to ISPs to as little as 20 percent to 25 percent, down from the current 35 percent of Internet service revenue. "Our discussions with Cox and Comcast are complex and may take some time to complete," At Home Chairman and Chief Executive Patti Hart said in a statement Tuesday.
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