FON Home: Earthlink Gets Major Investment From Sprint

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.

Here’s the terms of the deal which cuts a swath across many of the two
firms’ respective fields, and one that we think bodes well for both.

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

* A five-year commercial agreement for Sprint to promote

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

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

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

“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

“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.

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