Windstream made it official that it is acquiring EarthLink for about $1.1 billion, including debt, creating a larger company with a broader set of fiber and network services assets for business customers.
By acquiring EarthLink, Windstream gains great scale not only on the network side with additional fiber, but also a deeper product set with SD-WAN and access into additional complementary market verticals.
On the network side, EarthLink will bring 29,000 route miles, 16,000 of which expand Windstream’s footprint, bringing its total to 145,000 route miles. These routes are strategically located in the Southeast and Northeast U.S. and are unique fiber routes that Windstream said are synergistic with its current network.
“On a combined basis, the network will span 145,000 route miles of fiber with EarthLink adding valuable strategic routes in the Southeast and the Northeast,” said Tony Thomas, CEO of Windstream, during a call announcing the deal and the telco’s third quarter earnings. “In addition, Windstream announced it is expanding its long haul network through the Western U.S. to add strategic routes and connect major markets across the country.”
Thomas added that combined with “fixed wireless in 40 markets, we expect to increase wholesale and enterprise sales opportunities while driving significant cost reductions as we bring more customers on-net.”
Louis Alterman, CFO of EarthLink, agreed that both companies will bring additional network value to each other with routes neither had before.
“Out of the 29,000 fiber route miles we’re bringing into the combined company, 16,000 are unique in the sense that Windstream does not have them,” Alterman said. “We think they’ll bring a lot of value in terms of their wholesale offering and vice versa they’ll bringing routes we don’t have.”
The acquisition will also provide complementary market reach and service capabilities. EarthLink will bring its new SD-WAN service, one that allows enterprises to connect deploying an enterprise WAN that uses SDN to determine the most effective way to route traffic to remote locations, such as a company branch office. Having a combined expanded national IP network will also multiply SD-WAN availability to more business customers.
Thomas said that he sees SD-WAN and UCaaS will enable the company to more effectively compete against cable and other competitors in the SMB segment.
“If you look at the SMB business, I think SD-WAN and UCaaS are going to be opportunities for us to differentiate,” Thomas said. “We have complementary UCaaS products and I am confident we can find a way to accelerate our efforts to create more differentiation in that customer base.”
EarthLink is already seeing SD-WAN momentum mounting. After launching a SD-WAN offering in September, EarthLink signed a deal to provide the service to 400 TGI Friday locations. That contract includes SD-WAN, MPLS and hosted voice services.
As a part of Windstream, EarthLink will also be able to take advantage of Windstream’s growing base of on-net circuits, a concept that will allow the service provider to better control the customer experience for enterprise customers.
“When I think about the enterprise business unit, we’re focused on expanding our on-net capabilities so the sales we bring into the door at Windstream are higher margin than they had been,” Thomas said. “When you look at the sole margin dollars, we can increase that over time.”
Besides the network and service synergies, Joe Eazor, CEO of EarthLink, said the two companies are complementary in terms of the markets they serve.
“If I look at products and our emphasis from SD-WAN all the way through to providing access solution and the expansion of our nationwide capabilities, I think one thing to add is we have strengths in different industry verticals,” Eazor said. “We are strong in retail and retail-like industries while Windstream has strength in health care and the government arenas and together we complement each other well in the market not just from a product, but also from an ability to serve more industry verticals.”
Analysts responded positively to news of the deal. Jennifer Fritzsche, senior analyst for Wells Fargo, wrote in a research note that "we believe the networks are complementary to each other, as both have strong presence in the South East, South and parts of the Midwest, and think ELNK's fiber assets might play a role in an additional agreement with CSAL.”
Under the terms of the agreement, EarthLink shareholders will receive 0.818 shares of Windstream common stock for each EarthLink share owned. The companies said that this ratio represents a 13 percent premium to the average exchange ratio of 0.721x over the month ended Nov. 3, 2016, the most recent unaffected trading day.
Windstream expects to issue approximately 93 million shares of stock valued at approximately $673 million, based on the company’s closing stock price on Nov. 4, 2016. When the acquisition closes, Windstream shareholders will own approximately 51 percent and EarthLink shareholders will own approximately 49 percent of the combined company.
Following the closing of the acquisition, Tony Thomas will continue to serve as president and CEO and Bob Gunderman will serve as CFO of the combined company. A number of EarthLink management members are expected to join the combined company to ensure a smooth integration. Three of EarthLink’s existing directors will join the current Windstream board of directors, bringing the total number of directors of the combined company’s board to twelve.
Set to close next year, the combined company, which will continue to use the Windstream name, will be headquartered in Little Rock, Arkansas, and maintain offices in key U.S. markets.
Windstream’s acquisition of EarthLink marks the latest deal in the rapidly consolidating wireline business services market. Last week, fellow telco CenturyLink reached a deal to acquire Level 3 Communications for $34 billion.