Is Earthlink looking to link up to a hosting company?

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.

Select recent telecom-hosting transactions

Date announced Acquirer Target Deal value
December 15, 2010 Telephone and Data Systems TEAM Technologies $47m
November 22, 2010 Sidera Networks Cross Connect Solutions Not disclosed
November 4, 2010 Windstream Communications Hosted Solutions [ABRY Partners] $310m
November 3, 2010 Cbeyond MaximumASP (assets) $31m
May 12, 2010 Cincinnati Bell CyrusOne [ABRY Partners] $525m
March 22, 2010 TDS Telecommunications VISI $18m
January 25, 2010 Cavalier Telephone NET Telcos (assets) Not disclosed

Source: The 451 M&A KnowledgeBase