IHS Global Insight Perspective | |
Significance | Sprint will shift 5.25 million subscribers from the wholesale segment to direct subscribers, with some implications for improved margins, and gain a new brand under its direct ownership. |
Implications | The wholesale segment has been a source of subscriber growth even as Sprint has faltered and lost subscribers over the last two years. Sprint will gain some benefits in terms of brand, scale, and synergy savings that should make the combined businesses more profitable. |
Outlook | Virgin has teetered on the edge of profitability with subscriber growth only slowly and unreliably edging upwards. Sprint now has at least four brands (five including the majority-owned Clearwire), which could create some growing management complexity, particularly as there is some crossover in target markets between brands. |
Sprint Nextel has announced that it will acquire MVNO Virgin Mobile USA, which runs on the Sprint network, for a total equity value of US$483 million, including Sprint's 13.1% stake in the business. Sprint will also retire all of Virgin Mobile USA's outstanding debt, which stood at US$248 million at 31 March 2009 but is expected to fall to no more than US$205 million by 30 September 2009. The deal will be cash free, with public stockholders in Virgin Mobile USA, who own some 43.3% of the company, receiving Sprint shares to a value of US$5.50 per share based on the 10-day average two days prior to closing of the deal, although with a collar on the exchange ratio of between 1.0630 and 1.3668. The Virgin Group, which holds 28.3% of the business, will receive the equivalent of US$5.12 per share for a total of US$133.1 million, and preferred shares will be exchanged at a value of US$8.50 per share. SK Telecom, which acquired a 15.3% stake in Virgin through the merger of the Helio business, will get US$4.94 per share of common stock for a total of around US$69 million, with preferred shares converted into common stock at a price of US$8.50 per share (see United States: 30 June 2008: Virgin Acquires Helio for US$39 mil.).
Sprint will pay the Virgin Group US$12.7 million to license the Virgin Mobile USA brand for an initial term running to the end of 2021, with renewal provisions that will allow the extension until 2047. Sprint will also pay Virgin Group US$50 million at closing for net operating losses available to be utilised by Virgin Mobile USA in the future under the tax receivable agreement, although again this can be paid for in cash or stock.
The deal is not fully settled, but with the Virgin Group and SK Telecom agreeing to vote a portion of their shares and with Sprint's stake aggregate to 40%, the transaction is expected to close in the fourth quarter of 2009 or early 2010.
Sprint describes the move as consolidating its position in the prepaid segment by bringing together the Virgin Mobile brand and the Sprint-owned "Boost Mobile" business under one umbrella. Both brands will, however, be retained with their "distinctive offer, style and appeal to different customer demographics".
Dan Schulman, the current CEO of Virgin Mobile USA, will take over the running of the prepaid businesses while Matt Carter, the current head of Boost Mobile, will continue in that role. Schulman said: "Sprint is committed to growing its prepaid business and this transaction will provide us with the resources and opportunities to compete more aggressively, and strengthen our position in prepaid." Sprint also noted that the deal would strengthen its prepaid business, facilitate cross-selling of Sprint products to Virgin's customer base, enhance free cash flow, create synergy savings from reductions to administrative and operational efficiencies such as distribution, and add to managerial talent—particularly with prepaid product expertise.
Outlook and Implications
Sprint itself has been losing customers rapidly for the last couple of years—down from 54.0 million at the end of the second quarter of 2007 to 49.1 million at the end of the first quarter of 2009. Sprint will now take some 5.25 million subscribers from the growing Wholesale and Affiliate category, which grew to some 9.40 million subscribers in the first quarter, and move them into the prepaid segment. Boost Mobile, Sprint's existing prepay subsidiary, counted 774,000 subscribers on the CDMA platform and 3.5 million on the iDEN network platform at the end of the first quarter.
Virgin has been competing in the similar value segment, but recently with only marginally higher costs for a full service offering than Boost has been able to offer (see United States: 3 July 2009: Price War Heats Up with US$45 Unlimited Offer from TracFone). While the prepaid segment has generally been strong throughout the recession, Virgin's performance has been patchy as competition in the value segment has been intense. Although the overall trend is for growth, seasonal fluctuations in performance have pushed subscriber numbers both up and down over the last couple of years with losses in the last quarter reflecting heavy competition (see United States: 12 May 2009: Virgin Fails to Retain Subscribers as 133,000 Leave in Q1). Virgin has been pressuring Sprint to enable it to lower its tariffs and meet this new level of competition, and working to introduce new products, including the Helio range of handsets and services and mobile broadband (see United States: 12 June 2009: Virgin Mobile USA Launches Contract-Free Mobile Broadband; Femtocells Could be Next and United States: 10 April 2009: Virgin Leverages New Sprint Deal to Lower User Fees).
Sprint will now be managing several brands including the Nextel sub-brand, which is used to market "direct-connect" push-to-talk services on the iDEN network mainly aimed at businesses; the core Sprint brand, which is a largely consumer-oriented post-paid service; the youth-oriented Boost brand; and the Virgin brand, which is targeted at low-value but mid-market groups such as students. Sprint also has a 51% stake in the Clearwire "4G" business, although that operates independently with Sprint reselling the WiMAX-based services under the Sprint 4G label. This may help to target particular segments of the market but could also be a cause for management complexity and dilution of the core brand, particularly as similar segments of the market are targeted by multiple brands—with users often recognising that these brands are just rebadged services.