We won’t know for a while if this was a steal or a ripoff, but Virgin Mobile USA has made it official: As expected, it’s buying rival “virtual” mobile carrier Helio for $39 million in equity; it has also agreed to sink at least $50 milllion more into the venture.
Why bother? Virgin Mobile subscribers buy prepaid mobile service for about $20 a month. Helio subscribers buy normal, “postpaid” monthly service — where you sign a contract and pay a bill each month — for about $80 a month.
Virgin says it loses 20% of its departing customers to postpaid plans with other carriers. So the idea is that Virgin will be able to jump into Helio’s market a year faster than it would be able to on its own; get some cool phones — 85,000 worth about $17 million; some cool software to boost mobile data revenue; and better rates from Sprint Nextel (S), which it buys wholesale airtime from.
To try and make the link-up work, Virgin Group and Helio parent SK Telecom (SKM) will also invest $50 million at $8.50 per share. (Virgin trades at $2.97 today, down 1% on the news.) Sprint, which owns part of Virgin, will charge 8% less per minute for wholesale service next year, with more reductions over the next three years, and a bonus $2.50 credit for each new customer Virgin signs up, with a $10 million cap. Helio also agreed to fire a bunch of people and throw out its brand, which will reduce its sales, general, and administrative expenses by more than 70% by the end of the year.
Virgin thinks the deal will be accretive to adjusted EBITDA this year, excluding non-recurring transition costs, and to be accretive to adjusted EBITDA and free cash flow next year.