EarthLink Inc. shored up its rank as the nation’s second largest fee-based Internet service provider Thursday when it acquired OneMain.com and its 762,000 subscribers.
With the two companies combined, EarthLink will provide dial up access to more than 4.2 subscribers nationwide.
EarthLink will purchase OneMain.com through a cash and stock transaction valued at approximately $308 million, or approximately $12.27 per share for each of OneMain.com’s 25.1 million common shares outstanding.
The purchase price consists of approximately $150 million in cash and approximately 8.8 million shares of EarthLink common stock valued at $158 million at Wednesday’s closing price.
The transaction expands EarthLink’s national market coverage from major population centers into rural communities and smaller cities where OneMain.com has focused its operational efforts.
Garry Betty, EarthLink chief executive officer, said it saw an opportunity to leverage wider market appeal and drive growth from rural and secondary markets in the U.S.
“Consistent with EarthLink’s mission to become one of the world’s leading ISPs, the acquisition of OneMain.com strategically positions EarthLink to capture market share in one of the fastest-growing segments in the ISP marketplace, rural America and smaller cities,” Betty said.
Steve Smith, OneMain chairman and chief executive officer, said its key business areas complements EarthLink’s strategic initiatives in its narrowband, broadband, Web hosting and e-commerce and advertising business segments.
“With EarthLink’s substantial resources and national presence, we believe today’s announcement brings together two like-minded organizations focused on delivering high levels of customer service and will enhance the online experience of OneMain.com subscribers,” Smith said.
In addition to EarthLink’s purchase of OneMain’s almost 730,000 dial-up accounts, the national ISP will pick-up 27,000 Web hosting customers, and 5,000 broadband customers.
The transaction is expected to close in the fourth quarter. With this transaction, EarthLink expects to end the year with approximately 5 million members and annualized revenues of approximately $1.3 billion.
Bill Whyman, Legg Mason, Inc. Precursor Group analyst said the deal illustrates the fact that scaling up is the only way to succeed in the Internet connectivity business.
“This is a race for scale, and scale drives down the economics of this ISP,” Whyman said. “EarthLink is still far behind AOL. But the real value of the deal is buying customers and throwing them onto your network.”
Whyman added that the market should expect to see more consolidation of ISPs.
“The retail ISP business is like a game of musical chairs,” Whyman said. “There are fewer chairs for ISPs to grab and sit in the market. EarthLinks acquisition of OneMain is part of the consolidation in the ISP market weve all been expecting. Just like the MindSpring deal, we can expect to see fewer ISPs playing in the retail market.”
EarthLink also announced Thursday that its board of directors authorized a plan to repurchase up to five million shares of EarthLink common stock through open market purchases.
EarthLink purchased MindSpring Enterprises Inc. in September 1999. The deal merged MindSpring’s almost 1.3 million subscribers with EarthLink’s members totaling more than 3 million customers.
OneMain acquired its subscriber base through a series of purchasing small regional ISPs across the U.S. Known as an ISP roll-up firm, OneMain stopped its buying spree last fall and transitioned its ISP collective into a formidable business focused on delivering local content to underserved markets.
America Online Inc. remains the
nation’s largest Internet service with more than 22 million members. But EarthLink is committed to rivaling the behemoth in the fee-based ISP market segment, even though it has some 18 million additional customers to acquire to catch up to America Online.
