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Jul. 29, 2009

Late yesterday, Sprint Nextel has confirmed it is acquiring Virgin Mobile U.S.A. for about $483 million. Rumors had been circulating for the past 2 days.

Sprint's new acquisition means it will operate the Virgin Mobile brand along with its Boost Mobile prepaid wireless division.

Boost Mobile ratcheted up some competition in the prepaid space earlier in February when it announced a $50 a month plan for unlimited talk, messaging and mobile Web access, virtually eliminating taxes and fees on top of that.

This will offer a stronger position for Sprint in the prepaid segment. Enhanced cross-selling of a full suite of Sprint products and services across a larger target audience will also be another benefit, so will the free cash flow accretive for Sprint.

Pali Research wireless analysts say the acquisition is a good one for Sprint because it provides about 5 million new mobile customers who are already using its network under the MVNO arrangement and doubles the size of Sprint’s prepaid business almost overnight.

The analysts say they believe Virgin Mobile felt compelled to sell because its customer base was declining, the prepaid space is getting much more competitive and it faced a $100 million debt maturity at the end of next year and it might not have had enough free cash flow to pay it off.

The agreement amounts to Sprint paying $130 per subscriber, which is slightly above what it costs Virgin to acquire a customer.

Then later, Virgin Mobile launched its own $50 a month plan. More recently, TracFone Wireless introduced Straight Talk, a $45 prepaid unlimited plan.

“However, the deal is a bit negative for Leap and Metro PCS,” the Pali analysts say in a research note. “Virgin Mobile USA really wasn't a player in the unlimited prepaid space but their distribution channels will likely help Boost Unlimited expand and there is always the possibility that Sprint reinvigorates Virgin’s unlimited offering.”

One of the big unknowns going forward is about the brands, notes telecom analyst Jeff Kagan. Sprint, Boost Mobile and Virgin now each have 3 different identities. “Will Sprint consolidate the brands going forward, or keep operating them all separately” he asks.

While Sprint is certainly increasing its presence in the prepaid segment with the Virgin Mobile acquisition, its rival wireless carrier in the CDMA space has not been as aggressive in pursuing prepaid customers.

Verizon Communications President and COO Denny Strigl reiterated that position in a conference call with analysts yesterday, saying Verizon Wireless is committed to the retail postpaid market, even though its brand is on reseller TracFone’s Straight Talk product.

Strigl described the use of the Verizon brand on the packaging as an experiment or six-month trial.

Sprint’s acquisition of Virgin Mobile is expected to close in December or in January 2010. As always, it is subject to various closing conditions, including FCC approval. The Virgin Group and SK Telecom have agreed to vote a portion of the Virgin Mobile USA voting shares owned by them that, when aggregated with the voting shares owned by Sprint, comprise about 40 percent of the outstanding voting power.

Both Boost Mobile and Virgin Mobile historically have gone after the youth market, although Boost more recently has made moves to broaden its base.

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Source: Sprint Nextel.