Last modified: February 9, 2001 8:10 AM PST
Sprint, EarthLink loosen the bonds of their alliance
The companies said that they have ended the exclusive terms of the alliance and Sprint's right to acquire the Internet service provider, which was set to go into effect in September 2001. Sprint will keep the right to respond to third-party acquisition offers with an offer of its own, the companies said.
Shares of Internet service provider EarthLink were up $1.03 to $9.94, or 11.56 percent on the Island ECN in pre-market trading. Long distance company Sprint saw shares move down $0.37 to $24.28 Friday morning.
The deal was struck back in the days when dial-up was the only thing to consider; EarthLink may now be looking for agreements with other companies to boost its DSL and broadband business.
On a conference call, analysts pestered the company regarding what kind of deals it would now make, and how soon they will come about. EarthLink CEO Garry Betty said it's hard to say, since the Sprint agreement has scared off other companies from discussions for the past three years.
When the companies first partnered three years ago, EarthLink's alliance with the long-distance company was seen as a boon. By partnering with Sprint, EarthLink could gain credibility and subscribers by hanging out with a well-established long-distance giant. Excite@Home made a similar move with AT&T and other cable giants.
Dot-coms and their established partners are rethinking such terms since Internet valuations have plunged and companies have been forced to seek other options and partners.
EarthLink has also said it will take a noncash charge of $11.3 million for the changes in the first quarter to write off intangible assets from the alliance.
Sprint will continue to own shares of EarthLink, but it has given up seats on the company's board. Other changes include the removal of the requirement that the companies co-brand their Internet offerings and reworkings of customer acquisition commitments.
In the short term, Sprint will continue to market the EarthLink-Sprint co-branded service to its dial-up customers, but in the future, it may market EarthLink's Internet application as Sprint services.
Sprint generally cannot increase its ownership percentage of EarthLink, but it does have the option to maintain its current position whenever EarthLink issues new shares.
Shares of EarthLink were up 59 cents to $9.50, a rise of 7 percent, on the Island ECN in premarket trading. Sprint saw shares close down 62 cents to $24.65 Thursday.
Jefferies & Company analyst Frederick W. Moran upgraded EarthLink Friday on the news. He lifted his rating to "buy" from "hold," and raised his price target to $15 from $12.
The analyst also said that based on several recent developments, he believes a strategic transaction between EarthLink and Microsoft may be imminent. Given the AOL Time Warner merger, Microsoft's MSN will need to enhance its ISP operations in order to compete. MSN's heavy efforts to grow ISP subscribers over the last year, combined with its recently announced plans to revoke its $400 rebate program and today's announcement of the amended terms of the EarthLink-Sprint alliance, are all evidence the two could partner, Moran said.
