EarthLink to Add One Communications to its Regional Stable

Event Summary

December 20, 2010 — EarthLink will acquire One Communications for $370 million: $85 million plus re-payment of $285 million net debt. EarthLink expects to gain $20 million in annual synergy over the next three years, as it integrates the business with its prior Deltacom and New Edge Networks acquisitions. One Communications has 113,000 SMB customers in 17 states from Maine to Virginia and westward to Illinois and Wisconsin; 629 colocations and 11,700 route-miles of fiber; and 1,500 employees.

Quick Take

Analytical Summary

• Current Perspective: Moderate on EarthLink’s acquisition of One Communications, because the ISP can combine its acquired Deltacom and New Edge Networks assets to build a super-regional carrier, covering major markets across most of the Eastern U.S. Unlike its previous acquisitions, One Communications is a more troubled company that needs major business process and integration work. This poses greater potential rewards, but also bigger risk, for EarthLink if the company can pull all the businesses together.

• Vendor Importance: Very high to EarthLink, because its cash-flow rich but rapidly eroding consumer ISP business means that the company has a limited time to place its bets, before its primary source of income fades away. EarthLink has been placing those bets on transforming the company into a national, facilities-based provider of converged IP business services. Besides considering small, facilities-free resellers to port onto its own assets, the company might next turn its gaze westward, looking for any potentially attractive CLEC deals to complement New Edge Networks' colocations.

• Market Impact: Moderate on competitors, because One Communications' business revenues have been deteriorating rapidly – 16% year-over-year from Q3 2009 to Q3 2010. Competitors have been taking away customers and cutting off the CLEC's competitive opportunities. EarthLink provides One Communications with an opportunity to rally the business, slowing declines of legacy customers and redoubling its efforts to sell converged IP services. Competitors will need to look out for a reinvigorated One Communications that can sell New Edge Networks' more sophisticated national IP portfolio of services.

CLIENTS ONLY

Competitive Strengths and Weaknesses

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Analytical Perspective

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