Contact: Ben Kolada
Earthlink on Monday said that it is acquiring regional competitive local exchange carrier (CLEC) One Communications for $85m in cash or stock, plus the assumption of $285m in debt. The deal is Earthlink’s second telecom play of the year, and from our view, it looks like the beginning of a strategy that’s already playing out at Windstream Communications.
The One Communications announcement came just three weeks after Earthlink closed the purchase of southeastern US CLEC ITC Deltacom. Both One Communications and ITC Deltacom are fairly large, as regional CLECs go. ITC Deltacom generated $451m in revenue in the four quarters before its sale, and we understand that One Communications came in at $575m in trailing sales. However, both companies’ sales were declining, and we suspect that the deals were primarily done to build out Earthlink’s facilities-based presence and lay the ground for an eventual hosting play.
If that’s correct, then the ISP will be setting itself on a similar track to the one laid by Windstream Communications. The Little Rock, Arkansas-based company picked up six telecom service providers before announcing last month that it was buying hosting provider Hosted Solutions. At least three other telcos have scooped up hosting companies just in the past two months. The reason for the shopping spree is pretty simple if we consider the relative growth rates of the two sectors: While the core telecom market continues to decline, hosters are putting up fairly solid growth – and that should continue. In their 2010 ‘Multi-Tenant Datacenter North American Market Overview’, our colleagues at Tier1 Research project that the sector’s total North American revenue will hit $11.1bn in 2013, up from an estimated $6.8bn this year.
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Source: The 451 M&A KnowledgeBase