Virgin Mobile USA’s purchase of fellow MVNO Helio L.L.C. allows Virgin to evolve beyond its low-ARPU customers to higher-paying subscribers, as well as gain a sophisticated handset portfolio, improve its debt levels and cut a better deal with network operator Sprint Nextel Inc.
Virgin Mobile announced Friday it plans to pay $39 million in equity for Helio in a deal it is hoping to close in the third quarter.
Acquiring Helio will give Virgin Mobile new and unique benefits, including the ability to evolve into the postpaid market, offer advanced data services and new user applications across their customer base, said Dan Schulman, Virgin Mobile USA CEO.
Aside from the strategic benefits, Schulman said the agreement will also benefit Virgin financially.
“The economics of this deal are excellent,” Schulman said. “It improves our capital structure and allows us to service our debt going forward.”
SK Telecom will gain two seats on the board and become Virgin Mobile USA’s second largest stockholder in exchange for a $25 million cash infusion. Virgin Group also will invest $25 million into the venture, which will allow the MVNO to pay down debt. Virgin will put the invested money toward its Term B loan, which John Feehan, CFO of Virgin Mobile, said would bring the debt balance down to $200 million by the end of the third quarter. Schulman also said Virgin is committed to pay a maximum of $25 million toward Helio’s debt.
SK Telecom’s investment
So what does this all mean for SK Telecom? The Korean telecom giant has yet to see a return on its investment; the company put $270 million in Helio last year; with its additional investment of $25 million, SK Telecom will own 17.2% of shares of the expanded Virgin Mobile, making it Virgin Mobile’s second-largest shareholder, ahead of Sprint, which will own 14.1% of the company.
At the time SK Telecom made the large investment with Helio in 2007, the MVNO had been burning through about $40 million a month. Although Feehan said that Helio had been doing a decent job of getting its finances back on track, Virgin still plans to cut costs and increase revenues. One of the biggest moves is to continue cutting staff.
Staff, store cuts, adds
Helio counts 570 employees, a hefty amount compared to Virgin Mobile’s 400 employees. By the time the deal closes, Virgin hopes to cut Helio’s employee head count down to 200. Helio is closing its five retail stores as well as kiosks, which Feehan said that would continue until all are gone.
Virgin adds 170,000 subscribers to its current customer base of 5 million. However, Helio customers averaged $80 ARPU during the first half of this year, which is equivalent to about 700,000 Virgin Mobile customers, which bring in monthly ARPU of only about $20, Schulman said.
“That equates to an LPV of four times that of Virgin Mobile customers,” Schulman said. “And while these customers were not profitable at Helio, we can make them immediately profitable [here].”
Virgin Mobile will also retain Helio’s customer technology platform which the MVNO said would have cost it $25 million and 12 months to implement themselves.
Virgin plans to keep its focus on the youth segment, but said those customers are moving to hybrid contracts that are postpaid, but don’t require contracts. The MVNO also said it will maintain the successful presence Helio holds in the Korean-American market.
Virgin also will pick up Helio’s handset inventory, which it values at $17 million.
Sprint Nextel deal
And as a result of the acquisition, Virgin can now obtain favorable network rates with its partner Sprint Nextel Inc.
“We’ve restructured our network rates so they are no longer tied to sprint’s costs but are solely tied to total revenues we push across the Sprint network in minutes, messaging and megabytes,” Schulman said. “Under the new agreement, we anticipate a minimum 8% discount to all of our effective per unit network costs for 2009 with further reductions over next three years. This new structure clearly reduces our third-party risks of being dependant on Sprint’s costs.”
Offering cheaper network rates will allow Virgin Mobile to attract new customers, Schulman said. Virgin aims to target customers in the $40-$70 range, which makes up 65% of the market, or about 140 million post-paid customers. Previously, because of its network structure, Helio was after the $80+ customers. Sprint has also made an agreement to pay $2.50 network usage credit for each gross add that Virgin Mobile produces, beginning on July 1st with a cap of $10 million. Virgin expects this to benefit gross margins over the next several quarters.
And because Helio and Virgin Mobile both run on Sprint’s network, Schulman said there will be no disruption to Helio customers and neither Virgin Mobile nor Helio subscribers will need to change handsets.
