Sprint Nextel Corp said on Tuesday it would buy out Virgin Mobile USA Inc in a deal that values the small wireless carrier at $483 million and pushes Sprint deeper into the low-end prepaid mobile market.
Sprint, which already owns 13.1 percent of Virgin Mobile, will pay a mix of shares and cash to buy the rest of the company from Richard Branson’s Virgin Group, South Korea’s SK Telecom and public shareholders.
The No. 3 U.S. mobile service also plans to retire all of Virgin Mobile USA’s debt, estimated to be no more than $205 million by September 30.
Virgin Mobile USA shares jumped 23 percent or $1 to $5.21, close to the $5.50 per share that Sprint is paying in shares to public shareholders.
The price is a 31 percent premium over Virgin Mobile’s closing price of $4.21 on Monday, though Sprint said the share swap ratio was subject to a collar of 1.0630 to 1.3668 Sprint shares per Virgin share.
While Sprint already rents space on its network to Virgin Mobile, some analysts were puzzled by its decision to buy the small carrier. Sprint already has its own prepaid unit, Boost, which offers consumers unlimited calls for a set monthly fee.
The deal will make Sprint more exposed to the toughest part of the prepaid market, in which customers pay in advance for calls on a per minute basis.
Analysts said the deal could be an indication that Sprint was having a difficult time turning around its main postpaid business, which serves high-value customers who pay monthly bills. Sprint is set to report quarterly results on Wednesday.
“I think Sprint is looking to delve deeper into prepaid possibly because the postpaid segment remains extremely challenged,” said Soleil Nelson Alpha Research analyst Michael Nelson. “It could be indicative of how tough things are in the postpaid side.”
Boost, Leap Wireless and MetroPCS have seen strong growth in prepaid services that offer unlimited calls for a monthly fee.
Sprint, which has been struggling to stem customer defections from its own mobile service over the last few years, said the deal would increase its free cash flow but did not give a specific forecast for the impact of the transaction.
“Sprint will continue to be challenged, as Virgin Mobile has been in the last few quarters, to retain their pay-per-minute subscribers,” said Nelson.
Source: Reuters