Virgin Mobile and a Venture, Helio, Discuss a Merger, By Andrew Lavalle - 10th May 2008
(Credit: The Wall Street Times)

Virgin Mobile USA Inc. and Helio LLC, two cellphone companies that offer service through re-sell agreements with Sprint Nextel Corp., are in advanced merger discussions and could announce a deal in coming weeks, people familiar with the matter say.

The discussions reflect consolidation pressure among mobile virtual-network operators, which resell wireless service from larger wireless carriers, as the wireless market nears saturation. While the market's slowing growth has hurt some big players, such as Sprint, resellers have particularly struggled, with some failing. Walt Disney Co. shuttered its Disney Mobile service in September, and Amp'd Mobile, a Verizon Wireless re-seller, declared bankruptcy last year.

Both Virgin and Helio have faced difficulties. Virgin, which markets prepaid plans popular with lower-income customers, is being squeezed by increasing competition from other low-end providers such as Leap Wireless International Inc. and MetroPCS Communications Inc., as well as the economic downturn, which has hit less affluent customers like Virgin's especially hard, said Michael Nelson, a telecom analyst at Stanford Financial Group. "Their customers are purchasing fewer minutes," he said.

Virgin, which has 5.1 million subscribers, reported disappointing first-quarter results earlier this week, announcing that its profit shrank 75% to $4.8 million, compared with $19.2 million a year earlier. Its October initial public offering was a flop, with Virgin shares dropping from a debut of $15 to $3.16 as of 4 p.m. composite trading Friday on the New York Stock Exchange.

Helio, which sells high-end handsets and services that tend to be more expensive and data-intensive, appeals to younger, tech-savvy consumers. It has relatively high average revenue per user of more than $85 per month, but only a few hundred thousand subscribers. That has hurt its bottom line. A venture between SK Telecom Ltd Inc. and EarthLink Inc., Helio said in September that it expected a full-year net loss of $340 million to $360 million. EarthLink reduced its stake after Helio's weak performance weighed on its own results last year.

A merger would help both companies diversify the types of customers they target. Since they both offer wireless service on Sprint's network, it would also be relatively easy to merge them from an operational standpoint, said Ranjan Mishra, president of research firm ESS Analysis.

But serving Virgin's prepaid customers and deeper-pocketed Helio subscribers could present marketing and technical challenges, he added. "These two customers are distinct, and their requirements are different," he said.

Telecom analyst Kevin Roe noted that Virgin has previously expressed interest in consolidating other mobile resellers. It benefits from competitive pricing arrangements with Sprint, which it could pass on to a partner, he said. But he questioned Virgin's timing, saying the market would be more confident after a stronger quarter. "Once they deliver that, then pursue these other opportunities like a Helio," he said. For now, "They should stick to their knitting."

The discussions between Virgin and Helio were previously reported on mocoNews.net, a mobile-industry Web site.

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