Sprint faced bidding war with unnamed company for Virgin Mobile

A mysterious company that is a "strategic competitor" to Sprint Nextel, identified only as "Company X," attempted to snap up Virgin Mobile USA shortly before Sprint Nextel announced its $483 million acquisition of the prepaid carrier in July, according to a filing Sprint made with the U.S. Securities and Exchange Commission detailing the acquisition. The disclosure adds an extra layer of action to Sprint's blockbuster acquisition of Virgin--Company X did not withdraw its offer for Virgin until four days before Sprint and Virgin Mobile announced their deal--and raises the possibility that Sprint may have been forced to pay more than it had initially anticipated for Virgin.

According to Sprint's lengthy filing, Sprint and Virgin Mobile first met to discuss a possible business combination on Nov. 20, 2008. The discussions continued throughout the winter, and Virgin engaged Deutsche Bank regarding its strategic options. Then, on March 18, 2009, representatives from Deutsche Bank brought up a timeline for approaching "Company X" about a possible deal.

"Deutsche Bank noted that among all potential acquirers in the market Company X would be the company most interested in acquiring Virgin Mobile USA other than Sprint Nextel, based on its perceived financial strength, similar business model and past management dialogue with Virgin Mobile USA," the filing said.

A little more than a week later, on March 26, Keith Cowan, Sprint's president of strategic planning and corporate initiatives, called Virgin Mobile CEO Dan Schulman to express Sprint's continued interest in acquiring Virgin Mobile. Schulman said that Virgin Mobile's board was reviewing its options, as well as other alternatives.

On April 1, Deutsche Bank reviewed a draft presentation that Virgin Mobile prepared for Sprint about its recent results, financial projections and transaction considerations. At the same meeting, Virgin Mobile's board gave the go-ahead to Virgin Mobile's management to respond to Sprint's inquiry--and to have Deutsche Bank contact Company X's executive officers.

Then, On April 15, Virgin's Schulman and a representative from Deutsche Bank traveled to Sprint's headquarters in Overland Park, Kan., and presented a proposal for Sprint acquire Virgin Mobile in an all-stock deal that valued each share of Virgin Mobile's common stock at $5. Two days later, Virgin Mobile's board agreed to simultaneously keep negotiations going with Sprint and Company X.

On May 16, Company X entered into non-disclosure agreement with Virgin Mobile. Two days later, on May 18, Sprint made a non-binding, stock-for-stock offer for Virgin Mobile with a value of $5 per share and agreed to repay Virgin Mobile's senior debt. On June 1, Company X submitted an offer with an implied price of $4.27 to $5.00 per share, to be paid in cash. Company X also proposed to repay all outstanding loans to Virgin Mobile USA by its stockholders.

In early July, Schulman had a series of discussions with the CFO of Company X while Deutsche Bank had a separate series of discussions with Company X's financial advisor. Schulman noted that certain key terms were missing from Company X's offer, including "proposed amendments to key agreements with Virgin Mobile USA's strategic stockholders, such as the PCS services agreement, the tax receivable agreements and the trademark license agreements," the filing said.

On July 10, Company X submitted a revised offer of $5.23 per share, but did not "propose terms or amendments to any key agreements with Virgin Mobile USA's strategic stockholders," related to PCS licenses, trademark agreements or tax liabilities, the filing said. Despite Virgin's urging, Company X did not submit another offer dealing with these issues.

At a special meeting of Virgin Mobile's board on July 17, Schulman discussed the status of the negotiations. He noted that negotiations and due diligence with Sprint had advanced, with a limited number of issues remaining. However, Schulman said there was "considerably less certainty of completing the transaction with Company X," according to the filing.

Schulman also noted that Sprint had indicated that it held a right to consent to any sale of Virgin Mobile, did not have to give its consent to a deal, and "would seriously consider whether or not to refrain from giving its consent to any transaction that would create or strengthen a competitor," according to the filing. Such a sale could also allow Sprint to shorten the terms of its PCS service agreement with Virgin Mobile. Virgin Mobile's board "concluded that Sprint Nextel would likely withhold its consent to the possible transaction with Company X."

On July 24, Company X withdrew its offer. Sprint and Virgin Mobile announced the deal July 28. Under Sprint's proposed $483 million offer for Virgin, Virgin Mobile shareholders will receive Sprint shares with a price equivalent to $5.50 per Virgin Mobile share, which represents a 31 percent premium on Virgin Mobile's closing price of $4.21 prior to the announcement. The transaction is expected to be completed in the fourth quarter of 2009 or in early 2010.

Virgin Mobile spokeswoman Jayne Wallace declined to comment on the identity of Company X, noting that it was a confidential transaction. She reiterated that the deal with Sprint provides maximum value to Sprint and Virgin Mobile shareholders and said the deal is still expected to close in the fourth quarter or early next year. A Sprint spokesman did not respond to a request for comment.

For more:
- see this SEC filing

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Article updated Sept. 4 to change the value of Company X's revised offer, issued July 10, to $5.23.