Sprint Nextel has a new approach to reversing subscriber losses: If you can't keep customers, buy them. On July 28, Sprint Nextel (S) said it was acquiring Virgin Mobile USA (VM) for $483 million in equity, including its existing 13.1% stake in Virgin. Sprint will also assume more than $200 million in debt.
The announcement came the day before Sprint announced it lost 991,000 subscribers on traditional wireless plans during the second quarter. That would bring to 5.7 million the number of subscribers lost by Sprint since late 2007. As of the end of the first quarter, Sprint had 49.1 million wireless customers.
In the second quarter, Sprint reported a loss of $384 million in $8.1 billion in revenues.
Buying Virgin is certainly a quick way to pick up 5.25 million retail customers. It may also be relatively cheap. Wireless carriers typically fall back on a combination of snazzy phones, catchy marketing, and a reputation for customer service and network coverage to attract customers. Sprint's reputation for coverage and service has suffered, making it harder for the company to keep customers. It takes $200 to $400 in marketing and other costs to sign up a new wireless customer. In Virgin, Sprint has paid about $140 per customer, according to FBR Capital Markets. Part of the reason Virgin went for so little is that it, too, has struggled to keep customers amid competition. In the first quarter, Virgin lost 133,292 users. "From Sprint's perspective, this makes infinite sense," says Rich Nespola, CEO of consultancy TMNG Global.
Gussying Up for a Sale? Virgin is also partly owned by Korean telco SK Telecom and conglomerate Virgin Group. When the deal closes in late 2009 or early 2010, Virgin CEO Dan Schulman will lead Sprint's new prepaid division, comprised of Virgin and Boost Mobile, a division added when Sprint acquired Nextel. Shares of Sprint rose 1%, to 4.59, the day the deal was announced.
Craig Mathias, founder of consultant Farpoint Group, speculated that Sprint may be trying to add customers in the runup to a sale. Possible acquirers include Verizon Wireless, AT&T (T), and T-Mobile USA. Still, regulators may look askance at an attempt by Verizon Wireless or AT&T, the two largest wireless carriers, to buy Sprint, which ranks No. 3. And AT&T and T-Mobile own networks that for the time being rely on a different technology than that of Sprint.
Other analysts believe Sprint or its rivals may soon attempt to acquire other smaller wireless carriers, such as MetroPCS (PCS) or Leap (LEAP). "This is a very small and modest step in the direction of market rationalization," says Craig Moffett, an analyst with Sanford C. Bernstein. These smaller carriers specialize in low-cost calling plans, which have resonated with customers amid the recession. Leap's customer base doubled in the first quarter from a year earlier.
Pay-as-You-Go Profiting Virgin, Boost, MetroPCS, and other smaller carriers emphasize pay-as-you-go calling plans, the industry's fastest growing area. Currently, about 17% of Americans use such prepaid plans. But within a couple of years, the percentage may rise to 25%, says Julien Blin, CEO of JBB Research. "Sprint has got a strategic view of wanting to grow in the prepaid space," says David Messenger, chief administrative and corporate development officer at Virgin.
Realizing this growth potential, and seeing Virgin's depressed stock price, multiple potential buyers began approaching Virgin Mobile late last year, and Virgin's board considered one other bid before voting to accept Sprint's, Messenger says. "The offer that Sprint made was clearly a superior offer," he says.
While Boost is strongest at small local retailers, Virgin is sold through Wal-Mart (WMT), Target (TGT), and Radio Shack (RSH). In the future, Sprint may also market mixed family plans, which would link prepaid offerings for children with the more expensive, postpaid ones for the parents, Messenger says.
Sprint may also be able to migrate some of Virgin's low-paying customers to postpaid plans. "They are buying the customers hoping to convert them to a postpaid plan," Mathias says. "A customer is a customer; they'll probably stick with you for a long period of time."