still faces daunting legal and operational challenges, analysts and money managers say Monday's move to issue a media tracking stock takes the company a giant step closer to defeating one bogeyman that has depressed its stock price since the May merger of broadband company @Home with Web portal Excite: a murky corporate strategy.
"I think it makes a lot of sense," says Drew Cupps, portfolio manager with the
Strong Enterprise fund, which is long Excite@Home. "I think we have two properties buried under one cover." The move will give investors a clearer view of both sides of the company's business, he says. Excite@Home's stock traded as high as 57 3/8 during Monday trading, up from its close Friday at 51 5/16. The day the merger was completed on May 28, the stock closed just above 63.
By issuing the tracking stock today, executives are trying to forge a clearer strategy and declare their intention to stick with the content business. If the tracking stock is issued, the company would be prevented by
Securities and Exchange Commission
rules from spinning off part of that business for three years, executives say. Plus, it would incur significant federal tax penalties if it tried to sell the media part of the business, analysts say.
The new tracking stock will reflect the value of the company's media assets -- not just the Excite portal, but online-marketing properties
, the programming rights of the @Home homepage, and the media portion of the interactive-TV business.
The assets grouped under the tracking stock, expected to be issued in the third quarter of next year, will be governed by a board of independent directors along with a few representatives from the company's cable industry partners. The media assets will also keep separate financial books.
, Excite@Home's biggest investor, praised the move, as did other cable partners such as
"This structure will allow Excite@Home to aggressively build its media business independently while working with AT&T and other cable partners to drive the deployment of services to consumers," said C. Michael Armstrong, chairman and CEO of Ma Bell, in a statement.
The tracking stock will not only allow @Home's cable partners to cut independent carriage deals with other portals, it will also help the company's media business by allowing it to grow without worrying about diluting the network ownership of its cable partners, says Michael Wallace, an analyst with
Warburg Dillon Read
Excite@Home's board "didn't want to do a lot of content deals," Wallace says. Warburg, which has a buy rating on Excite@Home, hasn't done any underwriting for the company.
As a result, Wallace expects that the tracking stock will lead to more partnerships, joint ventures and acquisitions for Excite@Home's media business. But Chairman and CEO Tom Jermoluk downplayed any thoughts that Excite is poised for a shopping spree.
"We are not here to tell you today that we're going on a rampage of acquisitions," said Jermoluk in a conference call following the announcement. "It's about giving us the flexibility for taking advantage of those opportunities when they do present themselves."
But at least one investor is not entirely convinced that the confusion is over.
"We've been waiting to hear something, but give us a little more," says Alex Cheung, portfolio manager with
Monument Advisors Internet fund, an Excite@Home investor. "How are they going to get in more homes and work together? I wonder if there is synergy there."
The strategic direction of Excite@Home has been unclear since September, when it was reported that AT&T, the company's largest shareholder, was considering a sale of the Excite portal. AT&T and other shareholders felt that Ma Bell should
stay out of the content business and stick to being a "dump pipe."
Since then, speculation that Excite@Home might sell the Excite portal has swirled around the company. But when the company
Blue Mountain Arts
Web site last month, the speculation seemed to subside. It has also helped that the company is having
greater success signing up new cable-modem subscribers as its cable partners focus more on the data side of their business. Excite@Home expects to have more than 1 million customers by the end of this year and about 2.5 million at the end of 2000.
"This puts to rest a lot of the rumors," says Deron Kawamoto, an analyst with
American Century Investors
, which is long Excite@Home. "I'm not jumping up and down, but it makes me feel better. Hopefully, this gets everyone back to what they should be doing."
Excite@Home isn't out of the woods yet: It still must continue to sign up more cable-modem subscribers. And it still must contend with at least one other bogeyman: the unpredictable legal system. The company is facing a federal court decision over whether ISPs should be allowed equal, or "open," access to the cable lines of its partners.
"The only reason I don't have a strong buy is because of the regulatory issue hanging over it," Wallace says. "You never know what's going to happen in the courts."