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EarthLink Buys ITC^DeltaCom, Opens Door for New Strategy


October 01, 2010

By Gary Kim, Contributing Editor

EarthLink is acquiring ITC^DeltaCom (Deltacom (News - Alert)), marking a key shift: EarthLink now will become a facilities-based provider in a new way.


Up to this point, EarthLink has operated businesses built on leased facilities. Now it will become an owner of backbone facilities for the first time. Not every broadband-based business has to make the jump from leased to owned facilities, but EarthLink's move shows that, in at least some situations, a business that has operated relatively successfully without such ownership can improve its operating metrics by doing so. 

"The acquisition will enable EarthLink to create a leading IP infrastructure and solutions company by combining its existing ISP and IP-focused businesses with Deltacom's integrated communications business," EarthLink said. 

Deltacom's 16,400-mile fiber optic infrastructure in the Southeast, over 75 percent of which is owned or controlled under Indefeasible Right of Use (IRU) agreements, includes a 14-state Synchronous Optical Network backbone with 35 metro fiber rings, 294 collocations and 20 voice and data switches. 

Deltacom currently serves more than 32,000 small and mid-size businesses, multi-location enterprises, government agencies and wholesale customers in the southeast with services including Multi-Protocol Label Switching and IP-based products. 

EarthLink Chairman and Chief Executive Officer Rolla P. Huff pointed to the deal's implications by saying it would enable EarthLink to better serve business customers, which have gradually become a more-important part of EarthLink's growth strategy since the consumer dial-up Internet access business has dwindled. 

"The capabilities we acquire with this acquisition will be complemented by our existing New Edge Networks (News - Alert) business as we combine our nationwide MPLS network capabilities with Deltacom's state-of-the-art infrastructure," said Huff. 

The combined company will be "especially well-positioned" to serve Fortune 1000 companies across the country, one-quarter of which are headquartered in Deltacom's footprint. "In addition, the Deltacom assets will enable us to further reduce our consumer ISP cost structure, which we believe will result in additional incremental cash flow from that business in years to come," said Huff.

With the acquisition, EarthLink's employee ranks will grow from approximately 575 people to just under 2,000 people. The company will continue to be headquartered in Atlanta, Ga., and led by Huff, President and Chief Operating Officer Joseph M. Wetzel, and Chief Financial Officer Bradley A. Ferguson.

Deltacom operates 35 metro rings and 16,400 total route miles of fiber across 14 states. Deltacom's revenue is running at about $440 million annually, with adjusted EBITDA margins of around 20 percent. Deltacom tends to serve smaller businesses and has 32,000 customers. 

The acquisition, following the earlier acquisition of New Edge Networks, which marked the biggest foray into the business customer space, shows EarthLink's strategy: transition off its consumer customer base and refocus on business customers. The big issue now is the mix of customers. New Edge primarily served enterprise customers, while Deltacom serves small and mid-sized customers. 

The New Edge Networks acquisition gave EarthLink a nationwide network of more than 850 switches and Internet routers with coverage reaching 100 percent of U.S. business addresses, though those facilities are based on leased capacity and connections. Deltacom gives EarthLink an owned-facilities footprint in the southeast United States that might allow EarthLink to become a more-focused competitive local exchange carrier serving business customers. 

Still, EarthLink serves more than two million consumer and small business customers. The company provides about 44 percent of those customers with broadband access, and the rest through premium dial-up, which is a business to be harvested, as it is declining. 

So perhaps the big issue is how long EarthLink can harvest revenue from its declining consumer premium dial-up business, and how fast it can grow its business customer revenues. 

The big challenge for EarthLink always has been that it is harvesting cash flow from a declining business, with no clear path forward in terms of revenue growth. The Deltacom acquisition complements the earlier New Edge Networks buy, and offers the potential for an actual growth strategy that would make EarthLink a business specialist, rather than a firm largely serving consumers. 


Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Tammy Wolf

 

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