Virgin Mobile to Acquire Helio

Call it a tale of two business models: Successful MVNO Virgin Mobile USA Inc. will take over struggling MVNO Helio for $39 million, the companies announced on Friday.

Like Virgin Mobile, Helio uses Sprint-Nextel Corp. as its underlying network provider, but that’s where the similarities end. Helio, a joint venture between SK Telecom  and EarthLink Inc., spearheaded by investor whiz boy and EarthLink founder Sky Dalton, built its business plan on providing glitzy, high-end multimedia services on advanced handsets, on a postpaid basis.

Since Helio’s launch in May of 2006, it has managed to gain a mere 170,000 subscribers, albeit with the relatively high ARPU of approximately $80 per month. The failure of Helio to move beyond a niche market has resulted in it becoming a drain on the already embattled EarthLink, which was and still is reeling from the slow failure of its municipal wireless gambit. EarthLink said last September that it would not continue to fund the MVNO; SK Telecom remained mum.

Virgin Mobile, on the other hand, is one of the success stories in the rocky MVNO market. While it does have a lot of debt on its balance sheet, its subscriber base totals 5.1 million according to its first quarter results, with net service revenue of $303.8 million and $10.4 million of free cash flow. It has targeted affordable prepaid service to the youth market, for customers looking for voice and messaging. It has so far stayed out of the advanced applications game; its latest service launch, earlier this week, is an unlimited talk bundle for $80 per month, with unlimited texting to be added on for an additional $10.

Rumors that Helio was on the block and that Virgin Mobile was interested began back in January, but analysts were skeptical at the time, noting that making Helio work would take more than a cash infusion. There also was talk of SK Telecom, widely known to be interested in expanding its U.S. presence, buying Virgin Mobile and merging Helio into that brand. Instead, Virgin Mobile will take over Helio on its own, with SK Telecom and EarthLink each providing a $25 million strategic investment into Virgin Mobile. Through its holding of limited partnership units and preferred stock, SK Telecom will end up with a 17 percent ownership stake and two seats on the board.

Virgin Mobile CEO Dan Schulman took on analyst doubts and explained on Friday what the deal will bring to his company, which can be summed up as “debt reduction and market expansion.” “The reduction of our long-term debt and the increase to our revolver will realign our capital structure, providing us with greater liquidity and increased flexibility to grow our business,” said Schulman, in a statement. “At the same time, we will acquire an asset which will add to our scale, allowing us to reduce our network costs and assure that Helio’s customers are immediately profitable when brought on to our cost structure. We expect the combined elements of this deal will drive increased Adjusted EBITDA and free cash flow.”

Virgin Mobile to Incorporate Helio’s Data Applications

Virgin Mobile plans to incorporate Helio’s data applications into its brand offerings, which will give it something else to sell. Helio has partnerships with YouTube, Google and MySpace that Virgin Mobile will leverage, and it will add higher-end handsets to the portfolio to go along with that. It will remain to be seen if Virgin’s brand equity will be sufficiently strong to succeed where the original Helio did not.

The transaction also gives it entree into the postpaid game, which represents a 140-million-subscriber available market, according to Nielsen Mobile. Considering that Schulman said a full 20 percent of disconnects churn to a postpaid plan, the ability to offer such service may be a good arrow in the quiver. Virgin Mobile plans to leverage Helio’s existing back office and billing systems to support the new line of business, and to roll out hybrid plans as well.

Virgin Mobile is doing the deal for limited partnership units equivalent to 13 million shares of Virgin Mobile USA class A common stock. The transaction is expected to close in the third quarter of 2008, subject to receiving regulatory approvals and satisfaction of other customary closing conditions.

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