One day ahead of its second-quarter earnings call, Sprint Nextel Corp. (S) announced it is buying prepaid mobile services provider Virgin Mobile USA (VM).
Sprint will purchase Virgin Mobile in an all-stock deal valued at $483 million, or $5.50 per share. That’s 31 percent higher than Virgin Mobile’s July 27 stock closing price of $4.21.
Meanwhile, if Virgin Mobile accepts a superior offer or otherwise backs out of the merger, it must pay Sprint a $14.2 million cancellation fee. Otherwise, Sprint will take on all of Virgin Mobile USA – it already owns 13.1 percent of the MVNO – and retire up to $205 million in its new subsidiary’s debt.
Why Virgin?
Virgin Mobile USA provisions its wireless plans over Sprint’s network. And since Sprint bears an ownership stake in the MVNO, the carrier appears to be signaling that shoring up its focus on the prepaid segment will help compensate for problems on the more lucrative post-paid side.
The supposition makes sense. The United States remains mired in a recession and as people look for ways to economize, more are turning to prepaid service plans. To that end, research firm ATLANTIC-ACM forecasts the prepaid market in the United States will grow by a compound annual growth rate of 3.9 percent through 2014, with a combined Sprint – operator of the Boost Mobile brand – and Virgin Mobile controlling 17 percent of that market.
Indeed, the two companies will incorporate their strengths and go up as one against the likes of low-cost carriers Leap Wireless (LEAP) and MetroPCS (PCS). Virgin Mobile is bringing more than 5 million subscribers to Sprint’s base of 49 million. Leap Wireless and MetroPCS both have lower numbers – Leap Wireless ended the first quarter with 4.3 million customers, while MetroPCS reported 6.1 million subscribers. Without a doubt, Sprint has the edge – in terms of numbers, anyway. And the company hopes to capitalize on that advantage.
“Prepaid is growing at an unprecedented rate with consumers keenly focused on value,” said Sprint CEO Dan Hesse in a prepared statement. “Virgin Mobile is an iconic brand in the marketplace that will complement our Boost Mobile brand.”
