Windstream’s $1.1B EarthLink deal adds complementary assets, but integration, service challenges remain

Windstream Business
Sean Buckley, FierceTelecom

Windstream opened its pocketbook this week, announcing that it would purchase EarthLink in a $1.1 combined deal, a deal that signals the telco’s desire to further grow its business unit with additional fiber and service capabilities. By purchasing EarthLink, Windstream will gain three key benefits: an expanded wireline fiber footprint, access to SD-WAN services and new customers to pursue.

As a combined company, the service provider will have a larger array of customers it can pursue. Windstream has been traditionally strong in areas such as the public sector and health care, while EarthLink has racked up a large base of customers in the retail market segment.

This may be the latest deal in the wireline telecom market, but Windstream and EarthLink are very skilled at conducting mergers and acquisitions. In order to build up its presence in the enterprise services market, Windstream purchased a number of competitive providers such as Business Only Broadband and Paetec, a deal that gave Windstream a national presence.

EarthLink has been no less aggressive. Over the past 10 years, EarthLink purchased multiple competitive and solutions providers, including most recently Boston Retail Partners, New Edge Networks and Deltacom. 

For Windstream, the focus will be on how they can integrate EarthLink into the fold and drive cross-selling across both customer bases.

Windstream reported mixed business services results during the third quarter. Windstream reported that its third quarter enterprise service revenues were $495 million, up $4 million sequentially. However, small business CLEC service revenues were $119 million, down sequentially from $125 million in the second quarter. 

Meanwhile, EarthLink reported that enterprise and mid-market business unit revenue was $98 million, up sequentially, but down year-over-year. EarthLink said the sequential increase was partially due to $2.3 million in revenue from its acquisition of Boston Retail Partners.

Despite the potential to provide synergies to Windstream, some analysts remain somewhat skeptical of Windstream’s move. Research firm Jefferies said in a research note that while a combined company could enable Windstream to gain additional services and network assets to target more business customers, questions remain if they could set a long-term growth path.

“The combination of two companies with like products and services provides for obvious deal synergies and the hopes for a greater share of the addressable market,” Jefferies said in a research note. “However, we struggle to see how the combination can transform the business to a path of sustainable growth, which remains WIN's biggest challenge.”

Mike Sapien, principal analyst of enterprise at Ovum, told FierceTelecom in an interview that Windstream could face challenges in bringing EarthLink into its fold.

“It will be messy integration as both firms have acquisitions they are still integrating,” Sapien said. “Integration will take longer than planned and new service launches will be slowed down.”

Complements on-net strategy
A key element of the synergy with this deal is that Windstream will gain a broader set of wireline fiber assets it can weave into its own network.

Windstream has set a goal to reduce reluctance on leasing off-net circuits from ILECs and other providers by building out fiber in more locations, and the EarthLink deal could further that goal. Specifically, Windstream wants to reduce the off-net rental costs to other ILECs by $1 billion.

Upon closing the deal, Windstream will have a total of 29,000 fiber route miles – 16,000 of which are unique in the sense that Windstream does not have already. EarthLink can bring more depth to Windstream in the Southeast, South and parts of the Midwest markets.

“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.”

Joe Eazor, CEO of EarthLink, told investors during the joint call announcing its merger with Windstream that it would also gain benefits from having a larger fiber network by pursuing opportunities to upsell business customers more services using more of its own on-net fiber connections.

“Our share of wallet potential of any one customer on a combined company basis is more significant than either one of ours independently,” Eazor said.

Still, one of the missing links that the EarthLink does not solve is the West Coast.

“They still have West Coast network gap,” Sapien said. “EarthLink will improve local access management and some additional coverage, but Windstream still needs West coast coverage.”  

Windstream has begun the process expanding its long-haul express fiber network into the Western region to meet growing wholesale and enterprise customer bandwidth demands. Set to be completed next year, Windstream will carry out the network build in two phases that will target large markets in California’s Bay Area and Silicon Valley, Nevada and Utah.

Shoring up SD-WAN
Fiber assets are only one part of the asset mix that Windstream will get from the acquisition. Windstream will also be able to gain further service capabilities like SD-WAN, a product 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.  

Following high profile SD-WAN announcements from Verizon and, more recently, AT&T, EarthLink announced its own SD-WAN offering in September. Having a combined expanded national IP network will also multiply EarthLink’s SD-WAN availability to more business customers.

To its credit, EarthLink has already been actively racking up SD-WAN customers, including a 400-restaurant contract with national restaurant chain TGI Friday's. EarthLink is providing a full suite of services to TGI Friday's including SD-WAN Concierge, MPLS, Cloud Express and Hosted Voice.

Although SD-WAN can run over any broadband connection, the combined company would have a greater set of on-net capabilities that would allow Windstream to better control the customer experience on its own circuits.

Sapien cautioned that Windstream and EarthLink “are fast followers to SD-WAN and need to pick up the pace” to make an impact.

Windstream’s acquisition may provide some great synergies, but questions will likely linger on if it will drive long-term growth. If Windstream can successfully navigate through the integration issues and service rationalization, the new company will become a formidable competitor to cable that is working to gain more of the wallet share of businesses.

– Sean