Virgin Mobile to acquire Helio for $39 million

Virgin Mobile USA will acquire Helio for about $39 million in a complex deal designed to improve its prospects in the tough mobile virtual network operator (MVNO) business.

The acquisition will bring Helio's postpaid data and voice services on distinctive phones with Virgin's prepaid service. Both companies resell capacity on Sprint Nextel's nationwide cellular network. Most carriers that use this MVNO business model in the U.S. have struggled, a problem analysts attribute to slim margins and high marketing and distribution costs.

Virgin Mobile USA is a part of Richard Branson's Virgin Group conglomerate and was a pioneer in the MVNO business. Helio is a joint venture formed in 2005 between South Korea's SK Telecom and ailing ISP (Internet service provider) EarthLink.

In addition to the all-stock acquisition, Virgin Group and SK Telecom each will invest $25 million in Virgin Mobile USA.

As a result, SK Telecom ultimately is expected to own about 17 percent of Virgin Mobile USA and hold two seats on its board. Virgin will use the proceeds from those investments to pay down part of its debt. And SK Telecom and Virgin Group have also agreed to provide an additional $35 million and $25 million, respectively, to increase Virgin Mobile USA's revolving debt facility.

The deal is subject to regulatory and other approvals and is expected to close in the third quarter. It should give Virgin Mobile more liquidity and flexibility to expand its business, the company said.

Buying Helio gives Virgin Mobile access to its approximately 170,000 subscribers who spend about $80 per month on average, according to Virgin. The average in the U.S. mobile business is about $50. Virgin Mobile had 5.1 million subscribers in the first quarter but reported a drop in earnings from a year earlier.

By scaling up, Virgin Mobile said it also is getting a better deal from Sprint Nextel. Under revised terms on its contract with the carrier, Virgin expects an 8 percent cut in 2009 in the cost of a minute purchased wholesale from Sprint. It expects further cuts in the next three years. Virgin's cost per minute will be tied to the amount of network traffic it generates rather than Sprint's network costs, the company said.

Both MVNOs have gone after young consumers, with Helio taking an aggressive approach with advanced entertainment-oriented data services and unique data-centric handsets. But its strategy has been costly, with EarthLink and SK Telecom pouring millions of dollars into the venture even as it lost money. Last September, EarthLink said it would stop investing more money in Helio.

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