Should Earthlink Abandon Muni WiFi And Helio?

Earthlink (ELNK), a long-time player in the Internet access business, has been trying to expand into new territory with several new ventures. In particular, the company has begun setting up municipally supported WiFi networks in some cities, including Philadelphia and San Francisco, and it owns a 50% stake in Helio, an MVNO cell phone carrier.

Neither initiative is helping much so far, which leaves Cowen’s Jim Friedland wondering what the company might be worth if it dropped both of them.

Friedland notes that the company’s run-rate spending on new initiatives in the first quarter was $121 million. He estimates that Earthlink’s core business - dial-up and broadband Internet access, primarily - is worth $9.80 a share. He notes that the WiFi and Helio projects “have potential value, but could severely hurt profitability and weaken the balance sheet if unsuccessful.”

Concludes Friedland: “We believe potential exists for near-term appreciation if EarthLink shuts down or further reduces spending on new initiatives.” One other key point: Friedland’s estimate on the company’s valuation is closely tied to his expectations on margins for its broadband resale business. He assumes 50% gross margins; at 55%, the value of the core business jumps to $12 a share; but at 45% it drops to $7.50.

Earthlink yesterday was up 2 cents at $8.25.

Comments

[Frank Rizzo]

Muni WiFi is a disaster. Earthlink should exit post-haste.