If it comes together, the deal would benefit all companies involved, including Sprint Nextel and Helio
Korean telecommunications provider SK Telecom has long wanted a bigger beachhead in the U.S. Last year the company went so far as to make an audacious attempt to buy a stake in Sprint Nextel (S), according to reports. That deal didn't pan out, but SK Telecom is once again combing the sands on this side of the Pacific.
SK Telecom has confirmed reports that it's in preliminary discussions to buy Virgin Mobile USA, the wireless carrier initially formed as a joint venture between Sprint Nextel and Virgin Group. The discussions extend to Helio, a wireless carrier that's 70% owned by SK Telecom and 30% owned by EarthLink (ELNK), a telecommunications service provider. "These discussions are in early stages," Helio spokesman Rick Heineman wrote in an e-mail. "There are no assurances that any transaction will result." (An inquiry sent to EarthLink was forwarded to Helio.)
If the companies do get together, it's not clear how the resulting entity would be structured. SK Telecom could combine the smaller carriers, reducing expenses by eliminating overlapping operations and boosting revenue by catering to a larger U.S. customer base.
Together, Virgin Mobile and Helio have 5.4 million subscribers. South Korea is years ahead of the U.S. in terms of wireless technology, and SK Telecom could tap its expertise to introduce advanced mobile applications to Virgin Mobile's and Helio's mostly younger customers, who tend to be early adopters of new technology. "Virgin Mobile will give SK a bigger user base with which it could experiment on various mobile Internet services," says Stan Jung, telecom analyst at Seoul-based brokerage Woori Investment & Securities.
Other efforts to widen SK Telecom's U.S. base include the creation last year of a $110 million U.S. holding company, SKT Holdings America, which is headed by Yoo Hyun-Oh, who until last year was the CEO of SK Communications, a subsidiary of SK Telecom that runs the popular social network Cyworld. "We are interested in entertainment and other content businesses as well as mobile financial services," SK spokesman Weon Hong Sik says. "An acquisition is in our cards for our content business."
SK also recently formed Mobile Money Ventures, a joint venture with Citigroup (C), to develop global mobile financial services. Each will invest $8 million to begin testing the services with Citi customers in selected Asian countries and North America.
To clinch the Virgin Mobile deal, SK Telecom may need buy-in from Sprint Nextel, which still owns a small sliver of Virgin Mobile through its Sprint Ventures arm. Sprint rebuffed SK Telecom's attempt last year to buy a stake in Sprint, according to published reports. (Neither company would comment.)
But Sprint may not veto a Virgin Mobile deal. Sprint is hemorrhaging customers who are disaffected by poor customer service and low network quality (BusinessWeek.com, 5/13/08), and the company has said it might sell "noncore assets" or take other measures to remain in compliance with financial covenants with lenders. In May, Sprint also lost big customers in Embarq (EQ) and Qwest (Q).
Helio and Virgin both use Sprint's network to provide wireless service and account for about 10% of Sprint's subscribers and more than half of its wholesale users. "Sprint is in a very different spot within the slowing wireless industry," says Chris King, an analyst with Stifel Nicolaus & Co. "Everyone's been feeding off [Sprint's] subscribers." (Sprint declined to comment on SK Telecom and Virgin's discussions.)
Virgin's Higher End?
Virgin Mobile has hit on rough shoals since its initial share sale (BusinessWeek.com, 2/14/07) in October, when it made its at 15. The stock has since tumbled amid the company's sluggish subscriber growth and a heavy debt load. Shares were worth 3.04 the day before the discussions with SK Telecom were made public and rallied to 3.43 as of the close of trading on May 16.
Virgin Mobile eked out a profit of $4.7 million on sales of $304 million in its most recent quarter. "They need to be more creative about products and services," says Samir Sakpal, an analyst at consultancy Frost & Sullivan. Virgin has been experimenting with more expensive calling plans, and a tieup with SK could help the company grab higher-end users.
A Helping of Helio
SK Telecom would surely try to use a link with Virgin Mobile to shore up Helio, which has not lived up to expectations. Last year, Helio lost more than $90 million a quarter, or nearly twice its revenue. Helio's subscribership is about 200,000 users, where it has remained since December. SK Telecom could reduce expenses in part by combining Helio and Virgin Mobile's IT and other operations.
The two smaller companies would also benefit from combining their hip, youth-focused applications. Helio offers mobile access to social networking site MySpace, while Virgin provides access to Facebook and Xanga.com. Helio also offers advanced video applications and an over-the-air music service that Virgin may want to copy.
Teaming up may be the last, best hope for Helio and Virgin Mobile. Several in their peer group, including Disney Mobile, ESPN Mobile, and Amp'd Mobile, have recently exited the market, leaving customers in need of a new home.