Sprint Nextel Corp. (S) made a surprise move July 28 when it said it will buy prepaid mobile services provider Virgin Mobile USA (VM), the MVNO in which Sprint already owns a 13.1 percent stake.
Sprint has agreed to pay $483 million, or $5.50 per share, in an all-stock deal. The price is 31 percent higher than Virgin Mobile’s July 27 stock close of $4.21. And if the deal collapses, Sprint has ensured it won’t be badly burned: If Virgin Mobile accepts a superior offer or otherwise backs out of the merger, it will fork over a $14.2 million cancellation fee. Otherwise, Sprint will take on all of Virgin Mobile USA and retire up to $205 million of its new subsidiary’s debt.
A Fresh Move for Sprint
Sprint has suffered notorious customer service, integration and cultural problems since acquiring Nextel in 2005. As a result, thousands of valuable postpaid subscribers continue to leave Sprint for AT&T Inc. (T) and Verizon Communications Inc. (VZ) each quarter. Focusing on the prepaid segment should help Sprint compensate for its troubles, especially as the never-ending recession forces people to economize in new ways.
Indeed, more and more wireless users are turning to prepaid service plans for just that reason and the growth in that niche only looks to increase. In fact, research firm ATLANTIC-ACM projects the prepaid market in the United States to grow by a compound annual growth rate of 3.9 percent through 2014, with a combined Sprint – operator of the Boost Mobile brand – and Virgin Mobile controlling 17 percent of that market.
Of course, it doesn’t hurt that Virgin Mobile USA already provisions its wireless plans over Sprint’s network. That means integration hiccups should be few and far between, at least on the network side. If they play their cards right, Sprint and Virgin Mobile will join forces to compete soundly against low-cost rivals Leap Wireless (LEAP) and MetroPCS (PCS). In terms of numbers alone, that appears doable. Sprint already boasts 49 million wireless customers; Virgin Mobile will add more than 5 million. Leap Wireless and MetroPCS, on the other hand, have fewer customers – Leap Wireless ended the first quarter with 4.3 million users, while MetroPCS reported 6.1 million.
