Judge rules Excite@Home can stop service

A U.S. federal bankruptcy judge ruled Friday that bankrupt service provider Excite@Home Inc. can cease service at midnight. Creditors requested the freedom to shut down the network as leverage in ongoing negotiations for either a buyout or more favorable contract terms with cable partners of Excite@Home.

However, it is not a certainty that Excite@Home will stop service. Negotiations that might resolve the situation are continuing between Excite@Home and several cable companies that have contracts with the broadband company to provide Internet service to customers. In a statement late Friday afternoon, Excite@Home advised customers to call their cable companies for the latest information on the availability of its broadband service.

Also Friday afternoon, several cable companies filed an emergency motion for a stay pending an appeal to the Bankruptcy Appellate Panel of the 9th Circuit in Pasadena, California. The panel could take no immediate action, or it could respond in a variety of ways, said Dale Bratton[CQ], an attorney at Heller Ehrman White & McAuliffe LLP in San Francisco, who represents Cox Communications Inc. The panel could issue a temporary stay to examine the appeal, or issue a long-term stay until it has ruled on the full appeal -- one that might take a year, Bratton added.

Judge Thomas E. Carlson did not grant a temporary stay pending appeal. The cable companies intend to appeal immediately, either through the Bankruptcy Appellate Panel of the 9th Circuit or the U.S. District Court for the District of Northern California, said Howard Steinberg, an attorney at Irell & Manella LLP in Los Angeles, which represents Charter Communications Inc., a cable company that partners with Excite@Home and whose subscribers would be affected by the service suspension. The cable companies haven't yet decided in which court they will appeal, he said after the hearing at the bankruptcy court here.

In presenting his ruling, Judge Carlson acknowledged a shutdown would inconvenience consumers but said that no danger is present that would justify forcing the company to keep operating. "It does not pose a significant health and safety risk," Carlson said.

Excite@Home, which filed for bankruptcy protection in September, has more than 4 million cable subscribers now caught in the service provider's financial death throes. Excite@Home contracts with cable companies, including Charter, Cox Communications Inc., Comcast Corp. and AT&T Corp. to provide broadband Internet access to customers and for services like network management.

Creditors wanted the freedom to get out of contracts with the cable companies that have deals with Excite@Home, contending those are not in their best business interest. Attorneys for the cable companies challenged the argument that the deals were not at market rate, but Judge Carlson said the creditors had only to assert that the contracts weren't in their best interest.

Excite@Home creditors' efforts to shut down the service are a tactic designed to draw a better bid from companies interested in buying Excite@Home or to improve on the price paid for existing services by customers.

AT&T made a US$307 million bid in September to purchase Excite@Home after the ISP filed for bankruptcy. But Excite@Home's creditors believe the $307 million offer is too low. AT&T holds a 38 percent ownership stake in Excite@Home and controls 79 percent of the company's voting interest. The bid cannot go forward until the bankruptcy court approves it. A separate approval hearing is scheduled for next week.

Negotiations between the cable companies and Excite@Home went through the night Thursday without success, a cable attorney said in court Friday morning.

At the outset of the hearing, an attorney for Comcast said that Comcast and Cox had a new proposal that was better than AT&T's offer, and requested the session be postponed so details could be worked out. The judge rejected that postponement. An attorney for the bondholders later said the offer had been rejected.

"It's clearly inadequate at this point," said William Weintraub of Pachulski, Stang, Ziehl, Young & Jones, in San Francisco. He declined to discuss details of the deal because it had not been made public.

What the bondholders would like to see is payment in full of the claims of parties with interests in Excite@Home, which would total approximately $1 billion, Weintraub said.

In a statement issued in response to the ruling Friday, Comcast Senior Vice President David Juliano said the company is continuing to talk with Excite@Home and hopes there will be no interruption in service. Comcast set up a number, +1-800-433-6963, for customers to obtain updates on service. Representatives of Charter and of Rogers Communications Inc. subsidiary Rogers Cable also said they are continuing to talk with Excite@Home and preparing to move their broadband customers to alternative Internet services should service be cut off.

Excite@Home's creditors have maintained in U.S. Securities and Exchange Commission (SEC) filings that the cable companies won't negotiate earnestly unless they face an impending threat of losing service.

Cable companies have been concerned about Excite@Home's future for most of this year, and those concerns were compounded as the Internet service provider's online advertising revenue deteriorated with the economy. The larger cable companies that have contracts with Excite@Home have started building out their own Internet service infrastructures. It is unlikely that they can move all of their subscribers over to alternative services if Excite@Home shuts down soon.

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