Sprint increases bet on prepaid; Buys Virgin Mobile USA

Sprint Nextel on Tuesday said it acquired Virgin Mobile USA in a stock swap worth about $483 million. The move is designed to cement its growing position in prepaid calling plan market. Sprint already owns 13.1 percent of Virgin Mobile.

In a statement, Sprint said it plans to put Virgin Mobile and Sprint's Boost Mobile under one umbrella. Sprint has embraced the prepaid calling market in the downturn. Sprint said the two prepaid brands are complementary and focus on different customer demographics.

Virgin Mobile USA had roughly 5.25 million subscribers through the first quarter with average revenue per user of $20. The operator lost 133,000 net subscribers in the first quarter.

Stifel Nicolaus analyst Christopher King said in a research note:

We view the acquisition as part of a strategy by Sprint Nextel to continue to diversify itself away from the post-pay business, in which it continues to struggle mightily against Verizon Wireless and AT&T Mobility.

Virgin Mobile USA has been a wholesale customer of Sprint Nextel for years, and recently acquired Helio, another pre-paid operator, last year. The transaction more than doubles Sprint's pre-paid subscriber base, with Sprint ending 1Q09 with 4.3 million direct pre-paid subscribers, but also more than halves Sprint's wholesale subscriber total, with Sprint reporting 9.4 million wholesale subs as of 1Q09.

King, along with other analysts, noted that Virgin Mobile had been struggling in the prepaid market. What's unclear is whether Sprint sees itself as primarily competing with AT&T and Verizon or prepaid players like Leap Wireless and Metro PCS in the future.

Virgin Mobile USA CEO Dan Schulman will lead Sprint's prepaid business when the deal closes. He'll report to Sprint chief Dan Hesse. Matt Carter, who runs Boost Mobile, will report to Schulman.

Hesse noted that the Virgin Mobile USA purchase positions it better in the prepaid wireless market, which is growing quickly. In recent quarters, Sprint has talked up its Boost Mobile service, which has seen lower churn rates. Sprint reckons that the Virgin Mobile purchase will be cash flow positive before administrative, operational and distribution synergies. Sprint will license the Virgin Mobile USA brand from the Virgin Group for $12.7 million through 2021.

The deal has a few moving parts. Each shareholder of Virgin Mobile USA gets Sprint shares valued at $5.50. Virgin Group, which owns 28.3 percent of Virgin Mobile USA will get $5.12 a common share and $8.50 for preferred shares. SK Telecom, which owns 15.3 percent of Virgin Mobile USA, gets $4.94 per common share and a preferred share rate of $8.50.

And to handle all of that wheeling and dealing Sprint said it will issue between 81.4 million and 104.7 million shares.