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Exclusive: EarthLink, a 90s Internet star, in talks to merge with Windstream - sources

By Liana B. Baker

SAN FRANCISCO (Reuters) - Telecommunications firms Windstream Holdings Inc and EarthLink Holdings Corp are in talks to merge in an all-stock deal that would allow them to better compete against rivals, people familiar with the matter said.

The transaction, which would result in Windstream owning slightly more than half of the combined company, could be announced as early as next week, according to the people, who asked not to be identified because the discussions were private.

While the companies are in advanced discussions, no deal is final and talks could still fall apart, the people cautioned.

Windstream, which provides telephone and Internet services to consumers in rural markets, declined to comment. EarthLink, which was an Internet pioneer in dial-up service in the 1990s, did not immediately respond to a request for comment.

The companies have both struggled to find revenue growth in recent years and are expected to seek cost savings by combining their communications networks and infrastructure, the sources added.

Windstream, based in Little Rock, Arkansas, had a market capitalization of about $653 million on Thursday while Atlanta-based EarthLink was valued at about $572 million.

Windstream had $4.76 billion in long-term debt as of June 30 while Earthlink had $466 million in debt at the end of last quarter, according to filings.

The merger, if completed, would come after larger rival CenturyLink Inc agreed to buy Level 3 Communications Inc in a deal valued at about $24 billion, with Centurylink keen to expand its reach in a crowded market that provides communications services to businesses.

Both Windstream and Earthlink are scheduled to report third-quarter earnings on Monday.

Last year Windstream completed a tax free spinoff of some of its assets into a publicly traded real estate investment trust (REIT) called Communications Sales and Leasing, Inc..

In 2011, it bought a nationwide fiber network called PAETEC for $2.3 billion including debt. WindStream's sales and revenue fell 4.2 percent to $1.36 billion in its last reported quarter compared to a year ago.

EarthLink has two parts to its business, a declining dial-up Internet service for consumers, and an Internet and data provider to small- and medium-sized businesses. The dial-up business launched in 1994 and was one of the first mainstream Internet providers, along with AOL and CompuServe.

EarthLink posted revenue of $240 million in its last reported quarter, down 15.3 percent compared to a year ago.

(Reporting by Liana B. Baker in San Francisco; Editing by Edwina Gibbs)