Sprint Nextel Corp. agreed to buy out Virgin Mobile USA Inc. for $420 million in stock, adding prepaid customers to strengthen a business that is outpacing its contract-subscriber unit.
The third-largest U.S. phone company will pay $5.50 a share to public shareholders of Virgin Mobile, whose biggest investor is U.K. billionaire Richard Branson’s Virgin Group. Virgin Mobile had 5.25 million customers at the end of March.
Sprint is taking a risk by increasing its exposure to the low prices and higher customer turnover of the prepaid market, said Chris King, an analyst at Stifel Nicolaus & Co. The company is still recovering from the purchase of Nextel Communications Inc. in 2005, which led to almost $30 billion in losses from writedowns.
“They’re more than doubling their prepaid subscriber base in an increasingly competitive pricing environment,” said Baltimore-based King, who advises investors to hold Sprint shares. “They’re becoming increasingly exposed to a subscriber base that’s simply out there looking for the lowest price.”
Sprint, which already owns 13 percent of the company, will also retire Virgin Mobile’s outstanding debt, which it expects to be no more than $205 million net of cash by the end of September. Sprint, based in Overland Park, Kansas, plans to complete the acquisition as soon as the fourth quarter.
Virgin Mobile jumped $1.07, or 25 percent, to $5.28 at 4:15 p.m. on the New York Stock Exchange. The stock has risen sixfold this year. Sprint added 4 cents to $4.59 and has more than doubled this year.
Bulking Up
Sprint lost 4.6 million customers last year after the $36 billion Nextel purchase led to complaints about call quality as the company struggled to integrate the Nextel network into its operations. The company wrote down most of the acquisition in 2007. The purchase also boosted Sprint’s debt, which stood at $20 billion at the end of the first quarter.
Virgin Mobile, which sells Sprint service under its own brand, gives Sprint more customers that buy mobile-phone service without a contract -- a business that is growing amid the worst economic slump in a half-century. Virgin Mobile’s Chief Executive Officer Dan Schulman will lead Sprint’s prepaid business, reporting directly to Sprint CEO Dan Hesse.
Sprint had 4.3 million prepaid subscribers, most of which were on its push-to-talk network obtained from Nextel, at the end of the first quarter. Its average monthly bill for contract customers was almost double the $31 the company got from prepaid subscribers. The prepaid unit’s customer-turnover rate was 6.7 percent, compared with 2.3 percent for contract customers. The company is set to report second-quarter earnings tomorrow.
Prepaid Competition
Sprint and Virgin Mobile compete with Leap Wireless International Inc. and MetroPCS Communications Inc. for prepaid customers, who often don’t have the incomes or credit histories to qualify for two-year contracts with larger carriers. MetroPCS offers unlimited talk time ranging from $30 to $50 a month. Sprint and Virgin’s unlimited prepaid plans are $50 a month.
“The acquisition makes a lot of sense for both Virgin Mobile and Sprint,” Thomas Weisel Partners LLC analyst James Breen said. “It gives Sprint some bulk in the prepaid space and it helps Virgin Mobile by having deeper pockets behind it.”
Breen has an “outperform” rating on Sprint shares and a “peer perform” rating on Virgin Mobile and owns neither.
Public shareholders own about 43 percent of Virgin Mobile. Branson’s Virgin Group, which holds about 28 percent, will get $5.12 for its common shares and $8.50 for its preferred stock. South Korea’s SK Telecom Co., with a 15 percent stake, will get about $4.94 per common share and $8.50 per preferred share.
The acquisition values Virgin Mobile at $483 million.
Raised Forecasts
Virgin Mobile, based in Warren, New Jersey, has focused on attracting customers who will pay higher prices for services such as data.
In May, it raised its forecast for 2009 earnings before interest, taxes, amortization and depreciation and some other items to $127 million to $142 million from a March projection of $117 million to $132 million.
Sprint was advised by Wells Fargo Securities and King & Spalding. Deutsche Bank Securities Inc., Colonnade Advisors LLC and Foros Advisors LLC are acting as financial advisers to the board of directors of Virgin Mobile.
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Sprint to Acquire Virgin Mobile USA for $5.50 a Share
Source: Bloomberg
Date: 07/28/2009
