Chello cancels merger with Excite@Home

The transaction had been "complex, with a number of difficult business issues to resolve," said Mark Schneider, chairman and chief executive officer of Chello's parent company, United Pan-Europe Communications (UPC). Schneider said the parties "worked hard" to resolve the issues, but were unable to reach agreement.

In July, UPC and Excite@Home announced their plans for the creation of Excite Chello. The new company was to combine Chello Broadband, UPC's cable Internet service provider, and the international operations of Excite@Home. They said it would be the largest broadband company outside of North America, operating in 15 countries in Europe, Latin America and Asia Pacific and serving more than 300,000 broadband subscribers.

But it was not to be. UPC recently indicated that it was unable to move forward with the Excite Chello transaction as planned due to market conditions, Excite@Home said in a statement. After considering alternative proposals, Excite@Home decided that it was no longer appropriate to pursue this transaction, the company said.

The difficult issues all come down to money, according to Ronny van Doesburg, a telecommunications analyst at Dutch investment bank F. van Lanschot Bankiers. "UPC has been doing sums. They probably realised that going public with the combination (Excite Chello) wouldn't create much value. You need to offer more than just Internet."

Van Doesburg added, "I see this as very negative for UPC. An initial public offering (IPO) of Excite Chello would have been an obvious way for UPC to get cash on short term. Now UPC is facing a dilemma." UPC needs to spin off at least one part of its business to generate capital within six or seven months or the company will face financial trouble, according to Van Doesburg.

UPC said it would instead focus on an internal merger bringing together Internet and television. "We are looking into a combination of UPC Media and Chello," said UPC spokesman Bert Holtkamp. UPC Media offers broadcast television and radio as well as services like video on demand and enhanced television. "An IPO of the combined UPC Media and Chello is an option," Holtkamp said.

The scrapping of the venture especially hurts Excite@Home's Web portal Excite.com, said Hellen Omwando, associate analyst at Forrester Research. "The deal would have put Excite in a good position to compete for premium content and services. Now they are in a quagmire. There is nothing that differentiates the Excite portal from competitors, they really did need a partner who would enhance what they have." The combination Excite Chello would have given Excite.com access to a broadband audience outside the US.

Chello suffers from the deal's collapse too, said Omwando, as "Chello has no content, they only provide pipes. What Chello lacks is a solid content partner, their content angle is lacking severely."

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