Virgin-Helio: Execs Explain Tie-Up; Confirms Helio Store Closures And Other Reductions
By Tricia Duryee - Fri 27 Jun 2008 07:58 AM PST
Virgin Mobile (NYSE: VM) hosted a conference call this morning to explain the acquisition of Helio, which will cost them $39 million, and will gain them a fresh $50 million of investments from Virgin Group and SK Telecom (NYSE: SKM) at a price of $8.50 per share. Release.
Virgin’s CEO Dan Schulman thoughts: “This accelerates our ability to offer a full suite of products to our existing base of 5 million customers...We worked hard to put together a transaction that benefits all those involved, and we are delighted to gain an important strategic partner in SK Telecom, one of the premier telecom companies in the world. The acquisition of Helio rapidly advances the products we can offer and adds a migration path to our most valuable customers, and let’s us enter the post-paid business...This is a natural evolution of our product strategy and builds upon our expansion of hybrid and prepaid services. We intend to integrate Helio’s functionality into our new handsets, support prepaid, postpaid and hybrid services, and we’ll have a greatly improved capital structure and substantially more liquidity.”
More from the call, including Q&A, after the jump…
Quick close: Expected in the third quarter, in the meantime Helio and SK Telecom will conduct cost-saving measures.
The deal: Acquiring 170,000 customers, who are generating $80 of ARPU, an inventory of 80,000 handsets, and Helio’s state of the art customer technology platform that would cost $25 million and 12 months to build on their own. Concurrent with the acquisition, they are getting $25 million from both Virgin and SK Telecom, which will let them pay down debt. “It significantly improves our capital structure.” The company will now have $135 million in revolving debt, up from $75 million before. This has allowed us to obtain more favorable network rates from Sprint (NYSE: S). We’ve restructured them so they aren’t tied to Sprint’s costs, but tied to how much volume we have, which will represent a 8 percent discount in 2009 with further reductions over the next three years. Plus, there will be a $2.50 network credit for each net subscriber added, up to $10 million.
Helio asset: The economics of the deal are excellent, with a track record of deep technology expertise, we are looking forward to leveraging the investments already made in Helio. We intend to accelerate the growth profile of Helio. Scale is the key to success. The customers weren’t profitable at Helio, but we can make them immediately profitable because of network synergies that will be achieved prior to close. We are acquiring a robust customer platform. We believe immediate entry into postpaid market is better than a long build. About 20 percent of disconnects go to postpaid services, “we need a full suite of services to retain our high-level customers. This move will enable us to rapidly expand and improve our offering of high handset range.”
Logistics: There will be no disruption for either customer base, and neither will have to change their handsets. We’ve been impressed with customer service. Many of our call centers are in the same locations. Helio’s main handset vendors are Samsung and Pantech, so there will be cost synergies there.
Cost structure: Helio has done an excellent job in improving efficiencies and cutting costs. But there’s more to be done. Because of the new deal with Sprint, we’ll be able to target $40 to $70 ARPU customers, whereas Helio could only target the highest level of customers at $80 ARPU. On Tuesday, we offered our unlimited offer, which demonstrates our flexibility with our new cost structure. Even at very high usage levels, these customers will be amongst our most profitable. We’ll detail our new post-paid offerings after the deal closes. We’ll expect Helio to continue the cuts of sales and distribution. Helio had five company owned stores and 50 kiosks, which have begun to shutdown and will continue to do so before the deal closes. Helio has been methodically reducing costs, and we estimate they will reduce by general and administrative costs by 70 percent by year-end, and that the customers will be profitable when the deal closes, and there will be further synergies in 2009.
Strategy: This will launch us into postpaid, but it’s not about attacking the incumbent carriers. With the integration of Helio, we’ll offer a unique offering to customers, which will reduce our churn. We’ll focus on the quality of the base, not aggressive growth. We plan to reduce third-party distribution from 1,200 locations and focus on the top 250 profitable stores. With a focus on integration, we anticipate 2009 handsets will have advance data applications available to prepaid, hybrid and post paid.
Reductions: Helio has 570 employees, but they expect 200 layoffs by year-end. That compares to Virgin’s employee base of 450.
Q&A:
Will the target market change?: No, we will still be focused on the youth market. “If you think about our product strategy, it keeps with the movement of our customers.” If we didn’t do something like this, we would continue to fall behind. Practically no one leaves us because they are dissatisfied, but because they are ready to have higher-end handsets, or can lock themselves into a contract.”
Any change to your employees? And change to 2008 guidance? The extra $35 million that you have, what will you do, more deals in the works, or did you need the cash?: There is no change to 2008 guidance. In terms of the extra $35 million in liquidity, in our view, having more liquidity is a better thing. It allows you to invest in the growth of the business. We feel like with this enhanced liquidity, we have more room for growth in the business.
Will the Helio name be dropped? Did you have to give up anything to Sprint?: On the branding piece, we intend that Virgin Mobile will be the brand going forward, we may continue to use the Helio brand in the Korean markets. What we are giving Sprint is more volume. The combined company together is a more substantial company with bigger volumes to come, Sprint was willing to give us network rate reductions and $10 million bonus as well.
MVNOs haven’t fared well, is there are one or two points, why the combo of Helio and Virgin will succeed?: We have very consistently said from the beginning building the wireless business is hard to do. In 2002-2003, we may have made it seem too easy and a lot of people jumped into it. The key to success is scale. It wasn’t until we got up to the 3-4 million range of customers, did we know we would have a successful business going forward. It’s like adding 700,000 prepaid customers. It improves our network costs, which is one of our largest. Over the next 18 months, it will improve by about $40 million. We have a much stronger capital structure to support the growth going forward. You can’t lump MVNOs together with all MVNOs, this is all about how to get to scale. Each were unique, but at the end of the day, you can’t be successful without scale.
Will you have access to Sprint’s WiMax network? It does, but we aren’t talking about the provisions around wholesale agreement. Right now we are concentrating on 1x and EV-DO networks. Through this platform, we’ll be able to offer a Helio “light” offer that may not want to upgrade the faster handsets.
Posted in: Companies, Operators, MVNO, Helio, Virgin, SK Telecom, Money, VC M&A, Mergers & Acquisitions
