US number three long distance telecoms company Sprint Corp has dumped its dial-up internet service business, by handing its 130,000 subscribers to ISP Earthlink Network Inc, as well as taking a 30% stake in the company, in a deal worth $180.3m. The move is a graceful exit for Sprint from the year-old internet dial up business, which made a loss last quarter of $30.9m. But Sprint has kept its hand in the game by outsourcing its dial up customers to Earthlink under a five year marketing alliance, and Earthlink is tied into selling its services under the Sprint/Earthlink brand name, while paying to use Sprint’s network and dial up hardware. Sprint has pulled a interesting deal, retaining the option to buy a controlling interest in Earthlink in May 2001 and committing to deliver 150,000 new internet customers to Earthlink every year. It shouldn’t have trouble doing this as it has 15 million existing long distance customers who can be sold the service. Earthlink has got itself a guaranteed 25% a year growth in subscribers or Sprint pays a financial penalty. Sprint has also engaged Earthlink as a long distance reseller, and in return has guaranteed Earthlink preferential and discounted use of Sprint’s internet access equipment and backbone facilities. Sprint will also be able to bill its long distance customers, cellular phone subscribers and EarthLink’s customers under a single bill. The companies are still negotiating on what they are going to do with their business operations, but apparently are planning to merge those as well.
Mistake
Earthlink got a good deal but badly needs the cash and debt facility. It hit the financial wall last August when it announced that its cash reserves were depleted and wouldn’t last out the year. The chief financial officer resigned, trading of shares were suspended for a day, and the company was saved from further embarrassment by a $15m private placement headed by investors from Soros Fund Management LLC (CI No 3,240). Earthlink chief executive officer Garry Betty claims that the whole affair was a mistake but admits that the company finished the year with just over $16m of cash, of which $15.6m came from private placements. News of the deal has sent Earthlink’s shares skyrocketing 46% since Friday to $46.75, while Sprint’s stock has fallen slightly to $58.88. The deal gives Sprint a 30% stake in Earthlink, through the purchase of $4.1m Earthlink convertible preferred shares for $100m, an injection of $24m in cash, and the $56.3m purchase of 1.25 million common shares at $45 a share at a premium of 40.6% over last Friday’s price.
