EarthLink's stock jumped as much as 11-3/8 in early trading today, but since has lost some of those gains. The stock was up 6-1/4, or 16 percent, to 44-7/8, by 11:30 a.m. PT, and Sprint's shares gained 7/16, bumping up to 59-1/16.
Today's deal is another example of telcos pushing into the Internet access market, an effort that has been marked by a series of deals struck with ISPs and search engines intended to spare the telcos from having to lead their own Net initiatives. MCI Communications (MCIC), for example, recently forged a content pact with Yahoo (YHOO). Powered by MCI, Yahoo Online will roll out later this quarter, and will feature Yahoo's content aggregation.
Sprint and EarthLink's united Internet service will be promoted by both companies through their marketing channels. The EarthLink-Sprint service also will be bundled with various existing Sprint consumer- and small-business-oriented products and services.
Under the terms of the agreement, Sprint will receive 4.1 million shares of convertible preferred stock in EarthLink. The telecom will initiate a tender offer to purchase an additional 1.25 million shares of EarthLink common stock at $45 per share, assigning the stock purchase aspect of the deal a $56.25 million value. The total shares will represent a 10 percent voting interest and a 30 percent economic stake in the Internet service provider.
Tom Weigman, president of Sprint consumer services, said that the company was motivated to make a deal with EarthLink by its determination that working with a service provider was a more practical way to enter the Internet space than starting its own effort from scratch.
"We are priming the pump, and we realize that this is a critical opportunity," said Weigman, noting that Sprint's Internet service has not grown as expected and that the lack of growth was a result of the company not pursuing the service with full force.
Analysts agreed that Sprint is piggybacking on EarthLink's success.
Fred Moran, an analyst at Furman Selz, said this deal makes sense all the way around. It will establish EarthLink as a major Internet access provider, and give the company greater financial flexibility. As a result of the deal, EarthLink immediately added Sprint's base of 130,000 subscribers, and Sprint guaranteed EarthLink 150,000 users each year for the next five years.
"The bigger subscriber base will unlock economies of scale for EarthLink," Moran said.
"Sprint has not had the time or manpower to properly execute an Internet growth strategy," he added. "Ultimately, consumer Internet access will be a gateway for long distance companies to have a foothold on a new communications channel. And Sprint decided to buy their way in."
The longer-term benefit for Sprint is that, once Internet customers use telephony, subscribers to EarthLink's service will use Sprint's infrastructure.
Charles "Garry" Betty, president and CEO of EarthLink, said the new deal allows EarthLink to remain an independent company.
"We will have more distribution channels, pushed by the strongest brands," Betty said. "We have become Sprint's strategic foothold."
After 39 months, Sprint will have a two-year window during which it has the option of purchasing EarthLink's remaining shares. If another offer comes in to buy the remaining stake before then, Sprint can up the offer price.
EarthLink will obtain existing users of Sprint's Internet Passport service, boosting its customer base to 600,000. The national ISP also will have access to Sprint's marketing and distribution channels, a five-year commitment from Sprint to deliver a minimum of 150,000 new customers annually, and preferred access to Sprint's data network. Sprint will receive about $24 million in cash and $100 million in convertible debt financing.
Also under the terms of the deal, Sprint will no longer market its Internet Passport service, and EarthLink will not push its solo service. Instead, the two companies will promote the combined Sprint-EarthLink service, for which a new logo is being designed.
Sprint also will gain two seats on EarthLink's board of directors, one of which will be occupied by William Esrey, Sprint's chairman and chief executive officer.