Money Matters, Simplified.
Sprint Nextel to hike stake in Virgin Mobile
by Jamie Anderson - July 29, 2009 - comments
By acquiring Virgin Mobile USA, Sprint Nextel is all set to make further inroads in the prepaid telecom market in the United States. The acquirer claims that it would manage Boost, it’s present prepaid product, and Virgin as separate brands
New York, July 29: Sprint Nextel Corp. (NYSE: S), the third largest wireless telecommunications network operator in United States, announced Tuesday that it will acquire the entire 15.3 percent stake that South Korea’s SK Telecom Co. (NYSE: SKM) holds in Virgin Mobile USA Inc. (NYSE: VM). Sprint already owns a 13.1 percent stake in Virgin Mobile.
The deal valued at $483 million, will enable Sprint make further inroads into the low-end prepaid mobile market. The Overland Park, Kansas based operator intends to retire the entire debt of Richard Branson’s Virgin Mobile, pegged at close to $205 million, by Sept. 30.
The business dynamics
As on date, Virgin runs on a rented network from Sprint. The latter already operates its own prepaid unit under the brand name Boost. As a part of the package under Boost, consumers are offered limitless calls for a set monthly fee.
One would not need an expert to tell that the time is propitious for Sprint to hike stake in Virgin. The announcement comes at a time when the wireless operator has a good strong customer base, the attrition level of customers, referred to as churn is at its lowest ebb, costs have been reined in and the demand is heading north.
Translating these four metrics into numbers, Sprint has access to 5.2 million subscribers of Virgin mobile. Virgin mobile added 630,259 customers in the first quarter of the year. The churn rate stands at 4.8 percent, down from 5.1 percent in the comparative period last year.
The earnings for Virgin stand at a healthy $19.1 million, way above the $4.7 million earnings reported in the last quarter of the last fiscal year.
Soleil Nelson Alpha Research analyst Michael Nelson said of the proposed acquisition, "I think Sprint is looking to delve deeper into prepaid possibly because the postpaid segment remains extremely challenged. It could be indicative of how tough things are in the postpaid side."
Deal means exit for SK Telecom
SK Telecom’s share would be a minimal 1 percent after it parts with the 15.3 percent stake. Lauren Kim, a spokeswoman at SK Telecom said, “This means there is no strategic value for us so SK Telecom has decided to sell the entire stake when market conditions are favorable."
The sale also means that there is a remote possibility now, for SK Telecom to extend its reach in the U.S market. SK Telecom had, in November of 2008, shelved a business alliance with Sprint due to the deteriorating business environment.