FON Home: Earthlink Gets Major Investment From Sprint
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For the past two years we've expressed the belief that huge telephone companies, despite their best efforts, simply don't know how to be Internet access providers.
It's like an elephant trying to be a flying squirrel, it causes far too many thumps on the ground and way too many bruised elephants. Latest large mammal to realize this: Sprint. The phone behemoth bought a chunk of the nimble Earthlink (NASDAQ:ELNK) February 11, sending ELNK shares soaring to $46.75, up 21%.
Our analysis shows ELNK at about 5x 1998 revenue, more along the lines of AOL (NYSE:AOL) and Mindspring (NASDAQ:MSPG), although both have positive earnings while ELNK doesn't yet.
Sprint could hasten earnings however.
1) Sprint will purchase approximately 30 percent minority stake in
EarthLink, as follows:
* Sprint will initiate a tender offer for 1.25 million EarthLink common shares at $45 per share;
* Sprint will receive 4.1 million shares of convertible preferred stock directly from EarthLink; and
* Sprint will secure status as the exclusive telecommunications provider promoted in EarthLink's channels.
2) In exchange for 4.1 million preferred shares and the right to
tender for 1.25 million common shares, Sprint will provide EarthLink
* All of Sprint's approximately 130,000 Internet Passport subscribers;
* A five-year commercial agreement for Sprint to promote EarthLink
through its marketing channels, including commitments to generate a
minimum of 150,000 new EarthLink members annually;
* A four-year network contract allowing EarthLink to utilize Sprint's
world-class data IP network at favorable prices;
* Approximately $24 million in cash;
* A $100 million line of credit in the form of convertible debt for
EarthLink's use, available incrementally over the first three years; and
* Agency status to bundle Sprint's telecommunications services with EarthLink services.
While we think the deal positions Earthlink as a major player going forward, we hope that Sprint doesn't get too involved in the day to day at Earthlink. After all, Sprint's own Internet access service has tweetered along to barely more than 100,000 subs--despite the great Sprint name, distribution, billing system and easy to remember ticker symbol: FON. But we think that's why it did this deal, to latch onto a firm doing it right.
As we wrote November 10 when ELNK was added to the Internet Stock Index (ISDEX):
"Earthlink Network is a growing consumer and business Internet solutions provider unique in its approach to customer service--over half of its staff is focused on just that--and in its marketing and sales efforts.
"In addition, the investment in EarthLink by George Soros' funds indicates a strong interest in its status going forward. ISDEX features a cross section of representative stocks in the Internet space, and EarthLink is a natural addition, one that Wall Street will want to watch."
At the time some may have thought that was market gobblygook. Sprint apparently didn't think so. Going forward we think both ELNK and Mindspring may have a good shot at filling the voids created by Prodigy and CompuServe being eliminated from Wall Street's radar.
Fast forward, a combined Earthlink and Mindspring could perhaps even jostle AOL or at least keep Steve Case up at night for several years to come wondering how to stop it.