Cold water chills EarthLink euphoria

Executives throw cold water on rumors that Sprint might soon buy the ISP outright, cutting short a Wall Street buying frenzy.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
2 min read
EarthLink Network executives today threw cold water on rumors that Sprint might soon buy their company outright, taking the steam out of a Wall Street buying frenzy that drove the company's shares up 37 percent Friday.

As the post-Thanksgiving euphoria diminished, analysts said that the rumor, sparked by a column in Business Week magazine, made little financial or business sense. EarthLink executives said their relationship with Sprint was not about to change.

"Lost in all the massive buying frenzy is the contractually noted fact that Sprint is precluded from buying any more of EarthLink until the end of a three-year agreement, which was signed last February," said Lise Buyer, an analyst with Credit Suisse First Boston.

"We would have to invite them in, and we have not done that," said Kristin Kappos, Earthlink's vice president of communications. "It's a rumor."

Last February Sprint bought about 29 percent of EarthLink's stock, transferred its own Internet subscribers to the ISP, and signed an agreement allowing it to pick up the rest of the company's stock after a 39 month "standstill" period.

Analysts say it would make little sense for Sprint and EarthLink to undo the agreement. The ISP is rapidly building up its subscriber base, embarking on a series of nationwide marketing campaigns--and has shown far more ability than Sprint to manage an Internet business.

"This is one of the best managed ISPs out there," said Jeff Sadler, a Robinson-Humphrey analyst. "Why cash in before the growth spurt ends?"

Andrea Grosz, a financial analyst with Everen Securities, downgraded the stock from a short-term "outperform" to a short-term "market perform" today. While she still expects the company to beat the market over the long term, its run-up over the last week has left its stock price precariously high.

The company still is showing considerable long-term strength, and will likely be folded into Sprint's portfolio eventually, she added. "We have always said that Sprint will buy 100 percent of EarthLink," Grosz said. "But we do not believe they are interested today."

The Sprint relationship has brought EarthLink financial benefits well beyond the 37 percent run-up in stock price sparked by last week's rumors.

The number-three long distance company is funneling about 40,000 subscribers a month to the ISP, analysts say. EarthLink should reach 1 million subscribers by the end of the year, and 2.3 million by the end of 1999, Grosz said. Other more optimistic estimates see EarthLink with as many as 4 million subscribers by the end of 2000.

Meanwhile, the company is pursuing marketing and cross-branding deals of its own, that have helped drive up its stock price in recent weeks. Last week, the company signed a deal with CompUSA to be the computer retailer's default ISP for training classes and in-store promotions.

Shares of EarthLink were down 8 percent to 66 in afternoon trading.