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Espernet Folds Up ISP Roll-Up

Espernet.com Tuesday notified its 43 Internet service provider partners that it was expediting their release from any further contractual obligations to the ISP roll-up efforts.

Under a "no shop" provision, Espernet.com entered into a mutual release of the ISPs. The move discharged each party of any further rights, obligations, or liabilities to the other, under the terms and conditions of contracting with Espernet.com.

Espernet.com filed its S-1 with the Securities and Exchange Commission in September. At the time, the firm announced its intention to acquire 43 local and regional ISPs that had partnered with Espernet.com to build a national integrated ISP network.

To finance the purchase of 43 Internet service providers, Espernet.com planed to raise $122.5 million from its initial public offering. Only the market did not agree with its valuations and several attempts to underwrite the deal failed.

Espernet.com concluded that it could not structure the stock offering to produce the financing necessary to fulfill both its contractual obligations with the ISPs and still reap a tidy profit for Espernet.com.

Espernet.com began negotiating a deal with an unnamed publicly-held company in December in a final effort to finance the ISP roll-up.

Paul Hart, Espernet.com executive vice president, informed its ISP partners Tuesday that the purchaser remains keenly interested in acquiring Espernet.com. However, the firm would not meet the termination date deadline to get the deal done.

"It is clear to Espernet.com management and to the management of the purchaser that the deal cannot possibly be funded either in whole or in part to meet the February 29 termination date," Hart wrote. "Nor, is it likely that the deal can be closed in the very near future."

"I am very disappointed to tell you that Espernet.com is not in a position to exercise its option under our contract. Accordingly, Espernet.com would like to take this opportunity to expedite your release from our contract."

Espernet.com management reported to its ISP partners two weeks ago that it had received an offer from a publicly-traded company for the purchase of Espernet.com and that it was in the process of negotiating a deal.

Espernet.com's ISP partners learned that should the transaction occur, Espernet.com would have been able to preserve the contracts with its ISP partners, but rather than receiving Espernet.com stock for the purchase, sellers would have received stock of the publicly-traded company for the deal.

Hart said that after a number of preliminary telephone calls were made, Espernet.com executives in New York met with the potential purchaser on January 31 and that a final deal could not be produced after weeks of negotiating.

"We remained in New York until February 9, as we negotiated the terms of the purchase and conducted preliminary due diligence on the company," Hart said. "We continued to negotiate after their return home, and concluded by Friday evening that, absent a change in conditions over the weekend, a deal could not be done. We have determined today that the deal cannot be done."

Hart said purchase price was never an issue.

"Funding, its source, and how quickly it could be accomplished was the impediment to getting the deal signed, and in the end, proved to be its downfall," Hart wrote.

Steve Reichenbach of Internet Nebraska, an Espernet.com partner, said Internet Nebraska anticipated the potential demise of Espernet.com in December and took action to grow the ISP before Espernet.com broke ranks.

"Internet Nebraska has felt this coming for a while now, so we acquired an ISP this month and are working on acquiring another provider soon," Reichenbach said.