Virgin Mobile USA to buy Helio for $39M

Complex deal also provides Virgin Mobile with huge investment infusion

Virgin Mobile USA Inc. announced an agreement today to buy Helio LLC, a 3G wireless network operator and youth-market cell phone provider, in a stock trade deal valued at $39 million.

The complex deal will help struggling Virgin Mobile USA financially with an additional infusion of $110 million, but it will also give Virgin Mobile access to a network that will help the company grow at lower cost, said Dan Schulman, CEO of Virgin Mobile USA. The carrier has about 5 million customers in the U.S. and is the U.S. wireless unit of Richard Branson's Virgin Group.

Virgin Mobile USA went public last October and built its business on prepaid accounts, offering inexpensive cell phones and prepaid phone cards through U.S. retailers. Access to a contract-based subscription plan, as offered by Helio, was considered a priority for Virgin Mobile, analysts said.

Los Angeles-based Helio is a joint venture of SK Telecom Co., the largest mobile provider in South Korea with 22 million subscribers, and Internet service provider EarthLink Inc. In addition to its 3G network and post-pay subscription plans, Helio has 170,000 data services customers and offers phones, including the Ocean, Fin and Mysto that appeal to younger buyers.

Virgin Mobile USA is acquiring Helio by offering limited partnership units to SK Telecom and EarthLink. The units are equal to 13 million shares of Virgin Mobile stock, valued at $39 million yesterday, Virgin Mobile officials said.

Of the $110 million being invested, $60 million will come from SK Telecom and $50 million from Virgin Group. SK Telecom will get 17% ownership of Virgin Mobile USA in return, the company said. About half of the $110 million total will go to pay down debt.

The transaction is expected to close sometime in the third quarter.

Analysts are not optimistic about the prospects of success for the venture. "Helio can fit nice in the contemporary, differentiated 'cutting-edge' style Virgin Mobile likes to promote, but will still be challenged in making the Helio business case work," said Phillip Redman, an analyst at Gartner Inc.

The challenges are many, analysts said, including the competitiveness in the marketplace from major players such as AT&T Inc. and Verizon Wireless, both of which have more than 10 times the number of subscribers as Virgin Mobile USA.

Alex Besen, a consultant with The Besen Group LLC in Oakton, Va., said it will be difficult to migrate prepaid, younger subscribers to a post-paid model.

"I don't think the deal will have a positive impact to the bottom line," Besen said, since both Helio and Virgin Mobile USA are already having financial difficulties and could face further problems in the next two years.

Both Helio and Virgin Mobile USA offer wireless connections by using the network infrastructure of Sprint Nextel Corp., making them both virtual carriers. Virgin Mobile USA also said today it has received an 8% reduction in the cost per minute of using Sprint's network, and expected further reductions over the next three years, which will help with the success of the deal with Helio.

Besen said Schulman would not comment when asked whether Virgin Mobile USA and Helio will have access to the Sprint Xohm WiMax network for faster data speeds. "I think they will not have access," Besen said, especially since Sprint is working on a partnership with Clearwire Inc. for future WiMax deployments. Without something like WiMax in its plans for high-speed networking, Virgin Mobile USA will continue to be challenged, Besen added.

Copyright © 2008 IDG Communications, Inc.

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