EarthLink ends hedge, warrant agreement for 3.25% convertibles due 2026

By Susanna Moon

Chicago, Sept. 5 - EarthLink, Inc. terminated the convertible note hedge and warrant agreements on Sept. 4 for its $258.8 million principal amount of 3.25% convertible senior notes due Nov. 15, 2026, according to an 8-K filing with the Securities and Exchange Commission.

In connection with the termination, the company will receive a payment from the counterparties to the agreements.

The company also is purchasing 2.5 million common shares the counterparties held in hedge positions for $22.7 million, based on EarthLink's (Nasdaq: ELNK) closing price of $9.02 on Sept. 4.

EarthLink said it believes repurchasing the common shares from the counterparties could mitigate any short-term hit to its trading price, as opposed to having the counterparties unwind their hedge positions in the open market.

The company said it entered into the agreements to reduce the potential dilution upon conversion of the notes if the company's stock at conversion were to trade at $9.12 to $11.20.

The notes would not be expected to be converted until Oct. 15, 2011 but could be converted before that in the event of certain business combinations, the release said.

In this event, the agreements would terminate, resulting in a cash payment to the company by the counterparties to the convertible note hedge agreement and a cash payment by the company to the counterparties to the warrant agreement.

The exact amounts would depend on the company's stock price at the time of a termination. There also could be a dilutive adjustment under these agreements if the company were to pay dividends or otherwise return cash to shareholders.

The company said it elected to terminate the convertible note hedge and warrant agreements because it believes the current benefits due to increased flexibility to pursue strategic alternatives outweigh the possible future benefits upon possible conversion of the notes in 2011.

EarthLink said it is not in active discussions regarding any material business combination or return of cash to shareholders and there can be no assurances that either would occur before 2011 or thereafter.

On Nov. 13, 2006, the Atlanta-based internet service provider priced $225 million of the convertibles with an initial conversion premium of 42.5%. The greenshoe was fully exercised on Nov. 16, 2006 bringing the deal size to $258.75 million.

The conversion ratio is 109.6491 per $1,000 principal amount, for a conversion price of $9.12.

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