Sprint Nextel and Virgin Mobile are getting married.
Sprint (NYSE: S) announced today that it’s buying Virgin Mobile USA (NYSE: VM) for approximately $483 million to ramp up its prepaid customer base.
The news comes at a time when telecoms are trying to boost customers in both the high and low end of their demographics as a way to maximize revenues as land lines become less popular.
Postpaid customers — that is, subscribers — are considered valuable because they pay monthly for a service that includes lucrative data plans for prepaid customers. But prepaid users are also coveted — the strategy is to bring budget-minded people into the fold of mobile services under these pay-ahead plans.
Sprint, which is set to announce second-quarter earnings tomorrow, is also facing unrelenting competition from the two larger U.S. carriers. No. 2 AT&T has seen its profits soar in part due to its status as the exclusive carrier for the Apple iPhone. Verizon, the largest U.S, carrier, is slated to get the updated BlackBerry Storm and Android handsets due out later this year.
While Sprint is currently the exclusive carrier for the Palm Pre, Verizon has also said it expects to be able to offer the Palm Pre early in 2010.
And while it’s unclear how the Palm Pre is paying off for Sprint in the meantime, the company’s looking elsewhere to beef up its bottom line.
Once the purchase of Virgin Mobile is complete, Sprint’s prepaid business will be led by Dan Schulman, currently CEO of Virgin Mobile USA, who will report directly to Dan Hesse, Sprint Nextel’s CEO.
“The acquisition of Virgin Mobile USA positions Sprint for even greater success in the prepaid wireless segment,” Hesse said in a statement. “Prepaid is growing at an unprecedented rate with consumers keenly focused on value. Virgin Mobile is an iconic brand in the marketplace that will complement our Boost Mobile [prepaid] brand.”
Sprint and Virgin Mobile see their prepaid brands as complementary, each with a “distinctive offer, style and appeal to different customer demographics,” Sprint said. Each party will continue to serve existing and prospective customers following the completion of the transaction, according to Sprint’s statement.
“Virgin Mobile USA redefined the U.S. prepaid segment when we launched seven years ago,” Schulman said in a statement. “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.”
The deal will also see Sprint taking over the Virgin-owned brand Helio, which Virgin acquired last year and maintains as its postpaid brand. Helio, Virgin and Boost are all Mobile Virtual Network Operators, or MVNOs — meaning that they act as carriers without owning the network itself. All three piggybacked on Sprint’s network.
As a result, industry observers doubt that the acquisition will run into regulatory obstacles.
“Because Virgin Mobile USA and its recent acquisition Helio are both MVNOs, we do not see the deal raising serious antitrust issues, and thus believe that DoJ will approve the deal,” according to a research note issued by Stifel Nicolaus Associates.