The rumored VirginMobile/Helio deal is now a reality. Virgin Mobile USA will acquire Helio from SK Telecom and Earthlink for an equivalent of 13 million shares of Virgin Mobile stock with a value of $39 million. Virgin Group and SK Telecom each will invest $25 million in equity capital in the company. SK will have a 17 percent investment in Virgin Mobile and two seats on the Virgin Mobile board of directors. The deal is supposed to close in the third quarter.
Virgin says that the Helio deal will be good for the MVNO because it will allow the company to offer differentiated data applications and enter the postpaid market. Helio has approximately 170,000 subscribers with an ARPU of about $80 and a handset inventory of 85,000 devices valued at $17 million. By acquiring Helio, Virgin expects to increase its volume of minutes and therefore drive down the company's cost per minute network usage deal that it has with Sprint. On a conference call this morning with investors, Dan Schulman, CEO of Virgin Mobile USA, said that Virgin's agreement with Sprint is no longer tied to Sprint's costs but instead is based on total revenues that Virgin delivers via airtime minutes and megabytes of data. Schulman says he expects a minimum 8 percent discount on network costs in 2009 with further reductions in subsequent years. "This reduces our third-party risks...and allows us more margin," Schulman said.
Virgin also will acquire Helio's postpaid platform, which Schulman estimated would cost the firm between $20 million and $25 million to build if Virgin wanted to try to replicate it from scratch. Schulman says that this platform is strategically beneficial to the firm because 20 percent of the firm's disconnects come from customers going to postpaid products so he believes that offering postpaid service will be a retention tool for Virgin.
Nevertheless, Schulman asserts that Virgin doesn't want to attack postpaid incumbents with a postpaid offering. Instead he believes that the integration with Helio will allow Virgin to reduce its churn and appeal to higher spending customers "We will focus on the quality of our base, rather than growing aggressively," he said. "We have modest postpaid expectations."
Schulman added that Helio will cut its sales and distribution costs before the acquisition closes. That means the company will shut down its five retail stores and kiosks. Yesterday FierceWireless reported that Helio's store in Denver had closed. Here's a photo of the sign on Helio's store.
Virgin will use the investments from SK Telecom and Virgin Group to pay down its debt. Both SK and Virgin also will provide an additional $35 million and $25 million respectively to increase Virgin Mobile's revolving debt facility to support ongoing growth.
- See this press release
Virgin Mobile USA poised to acquire Helio
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