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Sprint Nextel gains prepaid market dominance with Virgin Mobile USA acquisition

Sprint Nextel Corp. has reached an agreement to acquire Virgin Mobile USA Inc. for approximately $483 million to strengthen the carrier's prepaid offerings.

That figure includes the value of Sprint's current 13.1 percent fully diluted ownership interest in Virgin Mobile USA. In addition, at closing Sprint will retire all $248 million of Virgin Mobile USA's outstanding debt.

"This acquisition will strengthen Sprint's position in the growing prepaid segment of the wireless market by bringing together the Virgin Mobile USA brand and our current Boost Mobile brand," said Leigh Horner, Reston, VA-based spokeswoman for Sprint. "Prepaid is growing at an unprecedented rate as customers are focused on value in today's economy.

"Virgin Mobile USA and its customers will have the benefits of scale, synergies and access to a broader array of products and services," she said. "Following the close of the transaction, both Virgin Mobile USA and Boost will operate as separate brands in the marketplace.

"While both are prepaid offerings, Boost and Virgin Mobile USA have distinctive offers, styles and appeal to different customer demographics."

Sprint Nextel operates two wireless networks serving more than 49 million customers at the end of the fourth quarter 2008, making it the No. 3 carrier in the U.S.

Virgin Mobile USA is a mobile virtual network operator with more than 5 million customers.

For the first quarter Virgin Mobile USA reported total operating revenues of $337.3 million, up 2 percent year-over-year; net service revenues of $318.1 million, up 4 percent year-over-year; and net income of $19.1 million compared to net income of $4.7 million in the first quarter of 2008, up 301 percent.

Sprint hopes this acquisition will strengthen its position in the growing prepaid segment by bringing together under one umbrella the Virgin Mobile brand with Sprint's Boost Mobile business.

Sprint believes that the prepaid brands will not cannibalize each other.

"We believe these complementary prepaid brands will target unique customer segments, just as in postpaid, different offerings and brands attract different individuals and businesses, while benefiting from scale economies from an operations standpoint," Ms. Horner said.

"Overall integration of products, services and operations are decisions that will be examined between now and the closing of the transaction," she said.

Each brand will continue to serve existing and prospective customers following the completion of the transaction.

Sprint's prepaid business will be led by Dan Schulman, current Virgin Mobile USA chief executive officer, who will report directly to Dan Hesse, Sprint Nextel president and chief executive officer.

Mr. Schulman will be responsible for the business strategy and growth of the prepaid segment.
Matt Carter will continue to lead Boost Mobile and will report to Mr. Schulman.

Prepaid is growing at an unprecedented rate, with consumers keenly focused on value, according to Sprint.

The acquisition is also designed to enhance cross-selling of Sprint's full suite of products and services across a larger target audience and free up cash flow for Sprint.

Sprint believes that there are synergies to be derived from general and administrative reductions, operational efficiencies and streamlined distribution.

Translation: There will be layoffs.

Following the closing of the transaction, Virgin Mobile USA will continue to license the Virgin Mobile USA brand from the Virgin Group under the terms of an amended and restated Trademark License Agreement.

Sprint will pay $12.7 million for the initial term, which will continue through the end of 2021.

The agreement contains several renewal provisions that will allow Virgin Mobile USA to extend the term until 2047.

Sprint will pay Virgin Group approximately $50 million at closing as payment in full for net operating losses.

The transaction is expected to be completed in the fourth quarter of 2009 or in early 2010.

Virgin Mobile USA's Sugar Mama program, which let customers get free minutes in exchange for viewing commercials, has ended due to some operational issues, which impacted the MVNO's ability to effectively deliver and administer the program.

"We're working on new ways to help our customers out and there are a few programs currently in place in which customers can earn free minutes by referring friends to Virgin Mobile through Kickbacks or by creating their own ringtones, screensavers and wallpapers in Studio V and putting them up for sale," said Corinne Nosal, spokeswoman for Virgin Mobile USA.

Analysts' take
Some industry analysts questioned whether or not the acquisition of Virgin Mobile USA will pay the expected dividends for Sprint.

"I'm not sure where Sprint is going with this, although I know that they started to expand their prepaid offering, the Boost brand, and I would assume that this is part of that bigger move to capture more of the prepaid market with Virgin Mobile's customers coming on board," said Tuong Nguyen, principal analyst at Gartner, Richmond, VA.

"I'm not sure it's the best move, because I thought they had a good thing going with MVNO relationships, and I don't know if this will be an improvement over that landlord-tenant deal, where Sprint collects the rent and that's it," he said.

"They've been making money off the extra capacity that the MVNOs are leasing from them, but now they're going to be assuming those customers, taking care of those subscribers and running promotional initiatives."

Now that Virgin Mobile USA is being incorporated into Sprint, the biggest MVNO player in the U.S. is America Movil's Tracfone, which primarily targets lowest end of the prepaid market and uses Verizon Wireless' and AT&T's networks.

American Movil is very large in Latin America and Tracfone caters to the Hispanic community with many of its promotions.

Virgin Mobile USA and Boost Mobile are also competing with smaller carriers such as Leap Wireless and MetroPCS.

"The opportunity to attract prepaid customers is still growing, because as budgets get constrained, people are looking for more value for the money," Mr. Nguyen said. "Especially if you're having issues with a consistent paycheck, say, you can't pay the contract but you can do month-to-month and top up the minutes you need.

"I expect the MVNO/prepaid market to continue to grow over the next few years, with the target segment being income-constrained individuals who need mobile service," he said. "Virgin Mobile's branding and advertising have catered specifically to value-oriented youth, let's say 18-30-year-olds who are on a budget.

"With the downturn in the economy, consumers are looking to get more value out of all of their services, including mobile, so it's an opportunity for the MVNO/prepaid segment."

Another analyst expressed doubts that this acquisition would shake up the wireless industry.

"The actual impact of Sprint's acquisition of Virgin Mobile USA on the industry is pretty small, because it's really more of an internal accounting change than anything else," said Charles Golvin, San Francisco-based principal analyst at Forrester Research.

"It's really just converting Virgin from being an MVNO, reselling capacity that they're leasing from Sprint, to an actual brand where Sprint is accounting for its own network resources internally," he said. "In terms of service offerings and branding, very little is going to change, because Sprint wants to keep the Virgin brand separate, maintaining what it stands for among its customers.

"Virgin Mobile will have increased purchase power as far as its handsets, which may mean more selection for its customers as Sprint leverages its purchasing power with vendors."

Forrester also believes that the prepaid market is growing faster than the postpaid market.

"As far as Sprint's motivation, the postpaid market is largely saturated, that's why the acquisition is important and makes sense from Sprint's perspective," Mr. Golvin said.

"Sprint will benefit from the growth in prepaid customers, and it should improve the economic situation for Virgin a little bit, because they don't have to shoulder the costs of leasing Sprint's network infrastructure."