Street Awaits EarthLink's Restructuring Moves

EarthLink (ELNK) shares were higher Monday morning following an upgrade by CIBC World Markets analyst Srinivas Anantha, and similarly bullish comments by Jefferies & Co.’s Youssef Squali. Both analysts focused on the same issue: expectations that a significant corporate restructuring is likely coming soon.

As I noted in a July 2 Tech Trader column in the print edition of Barron’s, new EarthLink CEO Rolla Huff vowed to take 60-90 days to look at all of the company’s businesses - and then to come up with a new strategy for the company.

CIBC’s Anantha Monday morning raised his rating to Sector Perform from Sector Underperform; he noted that the stock trades at a multiple of 4x enterprise value/EBITDA. He also contends subscriber losses should peak by year end, and that free cash flow should stabilize in 2008. He expects a variety of restructuring initiatives, including the sale of some units and the narrowing of growth plans for others.

He thinks the company could save $20 million to $25 million a year from shutting down or reducing the scope of some of its growth initiatives, and another $10 million to $15 million a year from reducing expenses in its core connectivity business. Anantha thinks the company could divest its New Edge Networks unit, which targets the small- and medium-sized business market, generating $100 million to $120 million in proceeds.

Jefferies’ Squali lists four potential steps the company could take to boost shareholder value:

Sell non-strategic assets. He also mentioned New Edge, and thinks it could be worth more than $1 a share to EarthLink holders.

Exit Helio. Squali thinks the company should stop investing in the cell phone joint venture with SK Telecom; but he says that with 200,000-plus subs by the end of the year with an average monthly revenue per customer of about $100, it should find a buyer.

Monetize its Covad investment. He notes that EarthLink has about $6 million in Covad stock and another $40 million in debt.

Exit the Muni WiFi business. Squali says he would “welcome a move to exit this segment altogether.” He thinks the operating expense savings could be material, at least $10 million to $15 million a year.

Squali concludes that the stock could easily be worth 30% more than the company’s Friday closing price of $6.40; his price target is $9.60.