Virgin Mobile USA will pay $39 million in stock to buy operator Helio, the company said Friday.
The deal ends more than a month of speculation that the two troubled mobile virtual-network operators would combine forces.
As part of the purchase, Virgin Group, which owns Virgin Mobile USA, and SK Telecom, the South Korean phone giant that holds a majority stake in Helio, will each invest $25 million in the combined company. In exchange for its investment, SK Telecom will be given a 17 percent stake in Virgin Mobile.
Helio, which was created to bring advanced cell phones and services to the U.S. market, will add its 170,000 post-paid customers to Virgin's 5.1 million prepaid customer base.
Virgin Mobile hopes that Helio's offering will also help it retain existing customers. About 20 percent of those ditching Virgin Mobile's service leave for subscription services, said Dan Schulman, CEO of Virgin Mobile USA.
Helio's customers are considered to be among the industry's most valuable, spending on average about $80 per month on voice and data services.
I have said in previous blog posts that this merger simply makes good sense. For one, the companies each use Sprint Nextel's network to deliver service. In anticipation of this deal, Virgin Mobile has already renegotiated terms with Sprint to review the terms of its existing network contract. Virgin Mobile expects to achieve a minimum of an 8 percent reduction in cost per minute in 2009. And it anticipates further reductions over the next three years.
Virgin Mobile also anticipates that it can cut costs in other areas by more than 70 percent by combining the companies. Most of these savings will come from combining operations and reducing headcount.
The companies also have complimentary strategies that target the youth market. But Virgin Mobile, which is considered a hip brand, has targeted customers with little or no credit. The prepaid service allows them to get a cell phone with no credit check or contract. And it offers them great value. The company just introduced its $79.99 unlimited talk time plan, which beats similar plans from competitors.
Helio has gone after customers at the other end of the spectrum by targeting tech-savvy hipsters with cool new phones like the Ocean, and voice and data plans with unlimited usage. It also offers integration with popular Web sites, such as MySpace and YouTube. Other unique services allow subscribers to share or recommend music, and track their friends using GPS.
The cost savings and strategic synergies should help the combined company compete more effectively against the big four nationwide carriers: AT&T, Verizon Wireless, Sprint Nextel, and T-Mobile USA. These operators have been aggressively trying to meet the needs of value customers, such as the ones Virgin Mobile addresses. And they've also been introducing new phones to attract high-end data subscribers, such as the ones Helio has targeted.
"We believe that the acquisition of Helio, and the related strategic investments by SK Telecom and Virgin Group, are of enormous benefit to our business, both financially and strategically," Schulman said in a statement. "It provides us with a firm foundation to create a truly holistic, leading-edge product suite to service all of our existing and prospective customers."
UPDATE: This story was updated at 3:00 p.m. PDT with comments from Helio about its retail strategy and merger talks with Virgin Mobile USA.
Virgin Mobile USA is expected to announce a deal to acquire fellow mobile virtual network operator Helio as early as this week, according to a story in The Financial Times.
The report cites sources close to the companies that say Virgin Mobile and Helio's majority owner South Korean cell phone operator SK Telecom have agreed in principle to a deal. As part of this deal, Helio's subscribers will become Virgin Mobile USA-branded subscribers. And Virgin Mobile USA will give SK Telecom a 20 percent equity stake in the newly combined company. SK Telecom is also expected to invest a nominal sum in Virgin Mobile USA, the article said.
While the combined mobile virtual network operator will still be dwarfed by the four major wireless operators in the U.S., it will have a wider subscriber base that includes both prepaid customers as well as highly valuable post-paid customers. Since Virgin Mobile USA and Helio each buy wholesale capacity from Sprint Nextel to run their separate mobile services, a combined company could help them negotiate better rates with Sprint.
The companies have been rumored to be in merger talks since May. And last month, Virgin Mobile and Helio each confirmed they were in "strategic" discussions.
Earlier this week, Gizmodo reported that talks between Virgin Mobile USA and Helio's parent company SK Telecom had stalled. And Helio confirmed rumors that is closing its retail stores.
A spokesman for the company said that Helio has been reviewing its distribution channels.
"We will be putting our emphasis on the most profitable direct channels, Web and telesales, and stepping away from others," he said in an e-mail. "This means we have made the decision to close our Helio stores and kiosks in the short term. Each location will have its own timeline with most kiosks closing immediately and stores closing in the coming weeks."
A spokeswoman for Virgin Mobile USA declined to comment on the Times story. And the Helio spokesman reiterated that Helio, SK Telecom, and Virgin Mobile are in discussions about "potential strategic opportunities." He said the company would give an update when an agreement is reached. The Financial Times reported that SK Telecom representatives in South Korea declined to comment on the merger speculation.
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