As we have been reporting since the start of these talks, Virgin Mobile USA (NYSE: VM) has finally announced the acquisition of troubled MVNO Helio. We originally broke the news of talks between the two companies back in May. The acquisition will cost Virgin Mobile a paltry $39 million, paid in limited partnership units equivalent to 13 million of its shares, currently valued at $2.99. In addition, the company will take on a fresh $50 million of investments from British parent Virgin Group and SK Telecom (NYSE: SKM) ($25 million from each) at a price of $8.50 per share. VMUSA intends to use the proceeds from these strategic investments by SK Telecom and Virgin Group to pay down a portion of its existing senior secured loan. SKT and Virgin Group have also agreed to provide an additional $35 million and $25 million, respectively, to increase VMUSA’s existing revolving debt facility, which will support the company’s ongoing growth.
Keep in mind both Earthlink (NSDQ: ELNK) and SKT have invested around $600 million in this venture over the last three years.
More after the jump…
Helio, according to the companies, will bring in 170,000 post-paid customers, which is on the lighter side of the 200,000 figure that had been reported (which means churn has been higher than new customers since the start of 2008). These 170K customers have an ARPU of approximately $80. The deal also comes with a handset inventory of about 85,000 units with a book value of approximately $17 million.
For Virgin Mobile, the benefits of the deal include greater scale, lower cost for wholesale minutes from Sprint (NYSE: S), entry into the higher-ARPU post-paid market, and the acquisition of a technologically sophisticated platform, which was really Helio’s top calling card, so to speak. Excluding transaction costs, Virgin expects the deal to be immediately accretive to EBITDA.
Following the investment, SK Telecom will hold 17 percent of VMUSA and will be represented with two board seats. For SKT, this is a huge washout, and still somewhat stunning given that less than 9 months ago, it pledged $270 million in financing to the company. That investment pretty much took EarthLink, the company’s original partner in the 50/50 JV out of the picture. Lots more details in release.
Operational integration; expect major layoffs from Helio side: Helio will make significant cost reductions before the expected close of the transaction. Also after close, VMUSA expects to make further improvements to Helio’s operating and customer acquisition expenses, through handset volume discounts and improving VMUSA’s network rates through an amendment to its PCS Services agreement. It anticipates Helio’s SG&A expense to be reduced by more than 70 percent by the end of 2008, with the majority of savings coming from “the rationalization of distribution and headcount reductions”.
Tricia adds: The deal has a lot of great synergies, and helps build a foundation for an MVNO to succeed in the U.S. Late last week, there were rumors about Helio closing its stores and kiosks. The confirmation of that did not come today, but no doubt the two companies will lean on Virgin Mobile’s distribution strategy, which has an enormous footprint through retail partnerships like Wal-Mart (NYSE: WMT) and Sears. At the same time, Virgin will gain high-end data services from Helio. So far, Virgin has been focused on the low-end of the prepaid market. Helio will add the increasingly important data side of the business, which has done a good job of integrating things like MySpace, YouTube and Facebook into mobile phones. It also has a billing system set up for post-paid. The pair will allow people to test the waters with prepaid and then transition to a higher-end service when they are ready.
In the release, Virgin’s CEO Dan Schulman says: “This strategic acquisition integrates Virgin Mobile USA’s brand recognition, scale and extensive distribution with Helio’s accomplishments in advanced handset and content offerings. It provides us with a firm foundation to create a truly holistic, leading-edge product suite to service all of our existing and prospective customers. With about 20% of our disconnects currently going to postpaid products, we believe this new platform will be a powerful retention tool.”
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