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November 17, 2007
Breaking up is hard to do
So, EarthLink has made its next move, with its CEO stating yesterday that “[a]fter thorough review and analysis of our municipal wireless business we have decided that making significant further investments in this business could be inconsistent with our objective of maximizing shareholder value.” As expected, that’s carefully worded CEO-speak, and when combined with a statement about the current business having a book value of about $40 million, one can speculate about what this means.
Let the negotiating commence.
I propose that the statements by EarthLink’s CEO actually send two messages; In addition to the classified ad above, which might have the effect of soliciting parties who want to get in on a fire-sale, it also opens the door for cities where EarthLink has agreements and performance obligations to renegotiate terms – the most meaningful of which would relate to anchor tenancy – as a way to avoid less desirable outcomes under an Assignment.
Philadelphia is probably the most interesting case to dig into to understand exactly how difficult the break-ups will be. Since it was one of the early agreements to be negotiated, it lacked some of the safety-net provisions that EarthLink was successful in negotiating in later deals. For example, let’s look at the Assignment provisions in the Street Light Use Agreement for Philadelphia.
Section 17.16 deals with the issue of Assignment, and it says: EL shall not assign this [Street Light Use] Agreement, or any portion of it, without the prior written permission of PAID and the City, which permission may be withheld in their complete discretion, and any such assignment made without such consent shall be void and shall not operate to relieve EL from any of its obligations or liabilities under this Agreement;
That seems pretty clear; an Assignment would have to be on the City and PAID’s terms, but there are at least a couple of loop-holes.
..provided, that EL is entitled to assign this Agreement without the consent of PAID and the City pursuant to the sale or transfer of all or substantially all of the assets or stock of EL, or pursuant to a transfer or assignment pursuant to a reorganization or merger or assignment to a subsidiary that is wholly or majority owned and controlled by EL;
OK, so EarthLink can assign the Agreement if they sell or transfer all of the assets of EarthLink, Inc., or if they “spin out” the EarthLink Municipal Networks (EMN) division in such a way that it remains wholly or majority owned by EarthLink, Inc. But there’s more:
..provided, that EL shall remain responsible for defaults or damages under the Agreement caused by such entity and for such entity’s performance of the Agreement.
So, EarthLink doesn’t get out of its performance obligations by spinning out EMN, even if it could find outside co-investment. Finally, this provision turns to the issue of what Assignment authority the City has.
PAID, with the City’s approval but otherwise in PAID’s sole discretion and upon written notice to EL, may assign the Agreement to another City-related authority or agency created pursuant to the Pennsylvania Municipal Authorities Act of 1945, as amended, or the Pennsylvania Economic Development Financing Law, Act No. 102, approved April 23, 1967, as amended, that has substantially the same powers, purposes, and authority as has PAID, including the power and authority to enter into and to carry out and perform this Agreement.
This one’s more difficult to interpret as a layperson, but it basically says that The City can choose to assign its own authority in the Agreement, so long as the assignee has the authority to carry out its performance obligations.
That’s a layperson’s interpretation of just one provision of one EarthLink Agreement in this area. New Orleans, Anaheim and Corpus Christi will have their own specific issues. In many later agreements, EarthLink negotiated language that gave a little more “wiggle room” in areas where cities could terminate the agreement or control things like assignment. Often this language was worded to say that “..such approval could not be unreasonably withheld [by cities.]”
So begins the next chapter in the EarthLink municipal Wi-Fi novel. The inevitable break-ups that lay ahead will probably get much more attention than is healthy for a market that has more important business to tend to. The overall market marches forward in so many ways; new projects launched by cities, ad-hoc deployments by FON and Meraki gaining momentum, CBS deploying in mid-town Manhattan; Apple introducing a Wi-Fi specific store; WiMAX providers stumbling a bit and leaving the window open longer for municipal Wi-Fi – just to name a few. The fascination with EarthLink in this market has become like a reality show of sorts; a waste of time; not very productive; but somehow impossible to turn away from.
In a future post, we’ll pick up the issue of what can be learned – now that EarthLink has cleared up any confusion about its intent in this space - from municipal wireless Round 2 (we consider Metricom Ricochet to have been Round 1) and whether three times will be the charm – or a final nail in the coffin. We’ll also tackle the issue of whether anchor tenancy and institutional-use are actually the Advil for all municipal Wi-Fi aches and pains, which some have suggested that it is.
Posted by Greg at November 17, 2007 10:23 AM