AOL Enjoys an Unexpected Windfall, Courtesy of Excite

But a confusing cornucopia of 'coopetition' could cause consternation.
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It has always been predicted that the Internet will create some unlikely partnerships. But in bidding some $6 billion for

Excite

(XCIT)

,

@Home

(ATHM) - Get Report

, a bitter rival of

America Online

(AOL)

, has given its nemesis a nice chunk of its own stock. The resulting combination could test the definition of the "coopetition" so beloved by digerati.

For now, @Home's purchase of Excite will mean that AOL gets $576 million in @Home stock and inherit two major deals Excite has with AOL and

Netscape

(NSCP)

.

Warrants on Excite stock involved in one of those deals are now valued at an additional $91 million. The total shares involved would give AOL 5% of @Home, but how the deals survive is up in the air.

That Was Then, This Is Now

It was just last July that the rhetoric between AOL Chairman Steve Case and @Home CEO Thomas Jermoluk reached a crescendo. Jermoluk's ire was drawn by Case's intense lobbying of both

Congress

and the

FCC

to require cable operators to let competitors hook into their networks, much as local phone companies must do. Jermoluk told the

Washington Post

:

"If he expects us to ... provide broadband high-speed access to him without him sharing any of his revenue with us, he's nuts ... If he wants to become a business partner, he ought to become a business partner."

In today's conference call, Jermoluk repeated that sentiment, but far more diplomatically.

Nonetheless, with the acquisition of Excite, @Home and AOL at least sort of -- and perhaps just temporarily -- have become business partners. The deal also indirectly unites AOL with

AT&T

(T) - Get Report

, which is acquiring

TCI

(TCOMA)

, @Home's largest shareholder. Whew!

AOL, meanwhile, stands to pocket paper gains of $631 million on the @Home-Excite deal, based on today's ATHM close of 115. Of course, even if AOL recognizes those gains by selling, they won't affect earnings because Wall Street ignores gains from the sale of securities.

The gain comes from AOL's 10% stake in Excite (as of the latest

SEC

reports), half of a 23% interest acquired at $5.85 per share in a 1996 deal for Excite to produce AOL's

NetFind

search engine until at least 2001. At $115-per-share valuation of the @Home-Excite deal, AOL would have a $540 million gain on its Excite stake.

But that's not all: AOL is due to inherit warrants to buy 1% more of Excite when it closes its acquisition of Netscape. These are part of a deal signed last April in which Excite paid a total value of $90 million to Netscape to produce major portions of Netscape's revamped

Netcenter

portal, including a branded search service, in return for receipt of ad revenue sold on the services. Twenty million of Excite's payment was in warrants. The @Home-Excite deal values the gain on those warrants at $91 million.

However, both Netscape and Excite can terminate the agreement upon acquisition of the other by a third company. If so, refunds are due on a sliding scale depending upon date of termination. Data in SEC filings suggest that the refund would be around $25 million if cancellation with the required three months' notice were done today.

Excite CEO George Bell said today that Excite may cancel. No word yet of the druthers of Netscape/AOL. But until the mergers close, AOL and @Home lack legal claim to such decisions.

What the deliberations will do, however, is to put to an extreme test the notion of "coopetition." We'd love to be a fly on the wall at those meetings.

David Simons is managing director of Digital Video Investments, an institutional research firm. He has been in and about computer and online services for 25 years, as entrepreneur, advisEr and investor. At the time of publication, neither Simons nor DVI had any positions in any of the stocks mentioned in this column, although positions can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to him at

commentarymail@thestreet.com.