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Sprint Acquires Virgin Mobile

July 29, 2009

Taking an even bigger chunk of the fast-growing prepaid market, Sprint Nextel Corp. on Tuesday said it will buy Virgin Mobile USA Inc. in a stock deal valued at $483 million.

The deal was announced Tuesday and requires Sprint to pay $5.50 in stock for each Virgin Mobile share. Sprint already owned 13.1 percent of Virgin Mobile, which uses Sprint’s network for their service.

Sprint’s offer of $5.50 is a 31 percent premium to Virgin Mobile’s closing share price of $4.21 on Monday. Shares went up $1.05 in early trading on Tuesday, or 25 percent, to $5.26.

Just like other prepaid vendors, Virgin Mobile’s target customers are those who have bad credit or a low income who prefer not to sign long-term contracts or just wanting a bargain over contract plans.

Virgin Mobile has 5.2 million subscribers paying $20 per month on average. Sprint, on the other hand, has a subscriber base of 49.1 million. This number also reflects those using the network through wholesalers like Virgin Mobile.

This deal just further fortifies this year’s trend in wireless.

Verizon Wireless and AT&T are the top two carriers and they are still grabbing the more profitable contract customers, while Sprint and T-Mobile are left to duke it out for prepaying customers with smaller upstarts such as MetroPCS Communications Inc. and Leap Wireless International Inc.

However, there is a greater opportunity for prepaid carriers to grow than contract-based services, because the number of people who do not already have a cell phone and are eligible for contracts is quickly dwindling.

According to a tally by Sanford Bernstein analyst Craig Moffet, 79 percent of U.S. wireless subscribers already had contracts at the end of the first quarter. That number was at 87 percent four years ago.

Given its lower prices and lower profit margins, there is still a question as to whether the prepaid market should really be Sprint’s focus, according to Stifel Nicolaus analyst Christopher King. 

“The lingering question of what Sprint ‘wants to be when it grows up’ resonates more than ever with us following this transaction announcement,” King wrote in a research note.

Sprint shares fell 5 cents, or 1.1 percent, to $4.50.

Sprint ruffled industry feathers by introducing a $50-per-month prepaid unlimited plan under its Boost brand in January. This made things awkward in light of its relationship with Virgin Mobile, which sold an $80 per month plan. After negotiating with Sprint, Virgin Mobile brought out its own $50 plan in April.

Virgin Mobile’s stock this year began at 84 cents, but word of the new unlimited plan gave it a giant boost. It continued to ride that success despite a loss of subscribers once the carrier posted a rare profit for the first quarter.

To generate better economies of scale, Sprint plans to pair Virgin Mobile under one management umbrella with its own Boost Mobile prepaid business. Virgin Mobile Chief Executive Dan Schulman has been tapped to run the prepaid division. Sprint says they have no plans to tamper with the Virgin Mobile brand.

Virgin Mobile’s debt, which is believed to be at most $205 million as of September 30, will finally be taken care of by Sprint.

Sprint said it expects to complete the deal by late 2009 or early 2010.

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