UPDATE: Virgin Mobile to Acquire Helio in All-Stock Deal
NEW YORK -(Dow Jones)- Virgin Mobile USA agreed to buy Helio for $39 million in stock as the two struggling mobile-service resellers place bets that their combined operations will fare better in the tightening wireless market.
Virgin Mobile gets Helio's small, but valuable base of customers and access to advanced handsets and third-generation, or 3G, technology. Helio, a joint venture between SK Telecom and EarthLink, would be absorbed into a larger company better able to shoulder its costs. Both hope the combined companies' larger size, products and reach will allow it to better compete for shrinking base of available customers in the U.S.
For Virgin Mobile, the deal represents a natural evolution of its business model, Chief Executive Dan Schulman said in an interview with Dow Jones Newswires on Friday. Virgin Mobile made its mark with prepaid service, where customers pay ahead of time for the cellphone minutes they use and don't sign a contract. The company will be able to build upon Helio's customers, who have all signed long-term contracts and are considered more profitable.
Schulman noted that a fifth of its customer defections leave to switch to a contract plan. Those customers tend to spend more money than average each month. The Helio plan gives the customers somewhere within Virgin Mobile to move to.
"(The deal) is enormously beneficial for us," Schulman said. "It's a natural evolution to offering a complete portfolio."
The acquisition - which consists of Virgin Mobile handing over 13 million shares of its Class A stock to SK Telecom and EarthLink - combines Virgin's 5.1 million customers with Helio's base of 170,000 subscribers. Schulman said that those higher value customers are worth 700,000 typical prepaid customers.
The deal isn't without its critics. In the last quarter, Virgin Mobile reported net customer additions fell a staggering 94% as its base continues to be hard hit by the economic downturn. Helio has struggled to turn a profit and increase its own customer base. Its phones - a strong suit of the company - have lagged behind rivals such as Apple's iPhone.
"I don't think this really has a material impact on their operations," said Michael Gary Nelson, an analyst at Stanford Group Co. "I still think their market positioning leaves them between a rock and a hard place."
Wireless resellers, which lease capacity off a wireless carrier and sell it under a different name, have had a mixed history with many high-profile meltdowns, including by heavy hitters such as Walt Disney. With the penetration rate in the U.S. above 80%, it's getting tougher for smaller companies to compete.
Virgin Mobile expects Helio to immediately begin contributing to results when the deal closes, Schulman said, noting Helio's customer base can generate earnings before interest, taxes, depreciation and amortization of $30 million. Helio has yet to turn a profit, but has been aggressively cutting costs over the past year.
Virgin Mobile also expects to benefit from lower operating costs. Both companies buy network capacity from Sprint Nextel, and don't have to worry about differing technology. As part of the deal, Virgin Mobile's network costs are expected to fall and save the company $30 million next year. Sprint is providing another $10 million in network benefits in the form of credit for every gross customer addition, he added.
In an additional investment, Virgin Group, Virgin Mobile USA's parent company, and SK Telecom will each invest $25 million of equity capital in Virgin Mobile USA. The $50 million investment will be in preferred stock, convertible to Class A common stock, at $8.50 a share. The investment will bring SK Telecom's total ownership of Virgin Mobile USA to 17%.
"It does shore up their balance sheet and adds liquidity," Nelson said. "But at the end of the day, I don't see a major change in the business outlook."
SK Telecom and Virgin Mobile said in mid-May that they were in discussions to explore possible strategic opportunities amid mounting pressure to consolidate among mobile virtual-network operators, or MVNOs. But analysts reacted negatively to news, expressing fears that Virgin Mobile would be moved out of its prepaid comfort zone.
Virgin Mobile's stock recently fell 21 cents, or 7%, to $2.78, while SK Telecom fell 21 cents, or 1%, to $20.65. EarthLink fell 27 cents, or 3%, to $8.75.
-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com
(In-Soo Nam contributed to this report.)
(END) Dow Jones Newswires
Posted to the site on 27th June 2008
