Consolidation in the US market this morning with Sprint Nextel buying Virgin Mobile USA. The proposed deal makes Virgin worth US$483 million - a 31 per cent premium on the company's value when the markets closed on Tuesday night, writes Martyn Warwick.
Sprint Nextel is far from being the strongest or best regarded of the US mobile operators (it languishes at an uncomfortable Number Three in the hierarchy there) but does already own 13.1 per cent of Virgin Mobile.
The company says the buy-out will "strengthen its position in the prepaid market". Wall Street's reaction to the news was curious - Virgin Mobile stock shot up by 23 per cent (it rose by one dollar to $5.50) whilst Sprint Nextel fell back by 1.4 54 per cent to $4.48.
Payment, in the form of cash and shares will be made to the other owners including Sir Richard Branson's Virgin Group, SK Telecom of South Korea and various public and private investors both institutional and individual. Sprint has also agreed to pay off all Virgin's debt. This was estimated at $205 million as at the and of the last quarter.
Sprint Nextel already carries Virgin Mobile's traffic (as an MVNO Virgin does not have infrastructure of its own) and analyst reaction to the news of the takeover has been mixed. Some question the wisdom of the acquisition given that Sprint already owns Boost, its very own prepaid mobile arm that offers users an "all-you-can-eat" package for a flat monthly fee.
Industry observers also point out that the purchase will mightily increase Sprint Nextel's exposure to the cruel realities of the volatile and incredibly competitive prepaid sector and is a signal that Sprint is failing in its much-vaunted efforts to turn-around its weak postpay business. We'll find out how true that analysis is later on today when Sprint posts its latest quarterly figures.
But it's a fact that subscribers have been defecting from Sprint's own mobile offering in their tens of thousands for many months now and the company has proven itself unable to staunch the outflow.
Nonetheless, Sprint insists that it will run Boost and Virgin Mobile as two completely separate but apparently "compementary" brands and units - a strange decision given that Boost's customer service record is regarded as one of the worst in the US while Virgin's is considered to be one of the best.
Virgin Mobile comes well out of the deal. The company's strategy of late has been to get out of mature and saturated markets (it sold-off its 50 per cent interest in Virgin Mobile Canada to Bell Canada earlier this month) but to retain a brand presence in them.
Under the terms of the new agreement Sprint will maintain the extant licensing agreement through which it has the right to use the Virgin name and brand. Sprint will pay $12.7 million for the privilege on an contract that runs through to the end of 2021. It will also sign an option to retain access to the Virgin brand until 2047 - a time and date so far distant in terms of mobile telephony technology and markets as to be meaningless.
The acquisition requires the approval of US regulators but is expected to go through on the nod, probably by the end of the year or, at the latest, by the first quarter of 2010.
Meanwhile, up in the rarified atmosphere where the big US mobile beasts live, Verizon Communications has posted a 21 per cent fall in profitability and announced that it is to cut 8,000 jobs by the end of the year.
In the quarter ended June 30, Verizon's net profit was $1,48 billion. For the same quarter in 2008, it had been $1.88 billion. Landline revenues continue their inexorable downwards trend falling back by another 5.2 per cent during the last quarter alone - and the job cuts will be focused on the landline business. Mind you, Sprint does have an astonishing 235,000 employees.
The company's wireless business is the main engine of growth and, amazingly given the rigours of the current economic climate, actually reported a 28 per cent increase in subscriber numbers in the last quarter - many of whom will have been defectors from Sprint Nextel's Boost.
The trouble is, as far as the US operator is concerned anyway, is that Vodafone of the UK owns 45 per cent of Verizon Wireless and shows no sign of any willingness to relinquish its stake.
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