Deltacom, New Edge Networks Combine as EarthLink Business

Following the close of its purchase of ITC^DeltaCom, EarthLink Inc. announced it would combine Deltacoms fiber operations with the MPLS/IP VPN assets of New Edge Networks, the carrier EarthLink bought in December 2005, to form EarthLink Business.

EarthLink Business will sell products including voice, data, mobile and equipment over an IP network with regional fiber density. A spokesperson for EarthLink said details about EarthLink Business channel programs were pending as Channel Partners went to print. However, an e-mail to agents announced that New Edge Network’s President Cardi Prinzi would become executive vice president of sales and marketing for the new company.

EarthLink’s merger with Deltacom was finalized on Dec. 8, 2010, and the price grew from the original $516 million to $524 million.

EarthLink is creating a leading IP infrastructure and services company,” EarthLink CEO Rolla Huff said in a prepared statement. Weve acquired a business that has meaningful revenue streams, strong gross margins and unlevered free cash flow that positions EarthLink for future strategic value creation.”

If EarthLink makes good on rumors that it also will buy struggling CLEC One Communications, then the company appears to be on its way to transitioning from dial-up ISP to national business-services provider, said Brian Washburn, research director of network services at Current Analysis.

Thats because Deltacom covers much of the southeastern United States, while One Communications is positioned within the Northeast, mid-Atlantic and Midwest. With New Edge Networks in tow, EarthLink Business would be on its way to becoming a large, super-regional CLEC.  Neither EarthLink nor One Communications returned requests for comment by deadline.

That would start to get interesting,” Washburn said. But without that context of One Communications, I find the Deltacom transaction, at the rate they were paying, not to be favorable on its own.”

Craig Clausen, executive vice president of New Paradigm Resources Group, isnt convinced. EarthLink, with Huff behind it, is well aware it has to reduce reliance on dial-up Internet access. And EarthLink knows the transition is not a walk in the park,” Clausen said. The company is starting EarthLink Business wide-eyed and not ignorant of what it will take. That knowledge base, plus New Edge and Deltacom, sets them on a good course. Its a start overall.”

Deltacom doubled its third-quarter losses to $4.7 million and New Edge Networks revenue has decreased, too, Washburn pointed out. Deltacom shareholders received $3 in cash per share when the EarthLink takeover closed. EarthLink used about $199 million in cash for the overall total and assumed $325 million of Deltacoms debt.

Indirect sales agents for the two companies are of divided opinion about the combination and rebrand.  

“We are very excited about this and think that this will be very well received by the channel at large and our agents in particular,” said Doug Turpin, CEO of Venture Group Enterprises Inc., and a member of the agent advisory board for the former New Edge Networks. Turpin’s optimism is largely over access to the Deltacom network through a presumably more channel-friendly agreement.

Deltacom was criticized for cutting agent contracts in December 2009, a move some suspected at the time was positioning the company for sale. Deltacom subsequently started an exclusive agent program in February that targeted VARs in its region.

“Deltacom’s had two big  problems. First, it seems to us that they had unfair and unreasonable agent agreements, which kept us from ever signing with them. They did not seem to act in good faith when they stopped paying many agents all at once a few years ago, which validated our decision never to sign an agreement with them. Second, they seemed to have many problems in the provisioning process,” Turpin said.

“With New Edge buying them out, we will have no concern about their having a reasonable agreement or provisioning issues, as we work well with them.  I think this will generate a lot of positives for the agent community and the new EarthLink Business customer base.”

Josh Anderson, CEO of Telephony Partners LLC, a master agency that represented both Deltacom and New Edge Networks, agreed that there are benefits to agents from access to Deltacoms private data offering and more cost-effective fiber access for NEN clients in the Southeast. However, he said he doesn’t see obvious synergies in the combination. “That NEN and Deltacom dont usually overlap in the market would be a good thing if there was an argument for increased efficiencies by merging operations, but I dont think there is,” he said. 

He added that “the rebranding could be a good thing for Deltacom, which has long suffered from a reputation tarnished by its earlier provisioning issues and wild-west sales tactics.” However, he questioned whether the consumer-focused EarthLink brand will offer a better alternative.

Anderson also raised questions about the sales philosophy for the new entity. “New Edge Networks is essentially a channel-only sales model, and Im curious to see if Deltacom will be moved in that direction or if part of the plan is to leverage Deltacoms direct sales force to sell New Edge Networks within the Deltacom footprint.”