Sprint Nextel s said Tuesday that it is buying Virgin Mobile USA vm, one of the premier brands in the "prepaid" wireless market, for stock valued at $483 million.
The deal ends Virgin's high-profile push into the U.S. wireless market, which is dominated by AT&T and Verizon. The two carriers, with more than 170 million customers, control 65% of all wireless subscribers in the USA. Sprint and T-Mobile have around 20%. The balance is controlled by smaller carriers including Virgin, which has 5 million customers.
Walter Piecyk, a telecom analyst at Pali Research, says it's a good deal for Sprint, which already owns 13% of Virgin Mobile.
"This more than doubles the size of Sprint's prepaid business," he notes.
Virgin Mobile CEO Dan Schulman says the decision to sell was a tough one, but ultimately the right call for the company.
"We didn't do this because we didn't think we'd survive," he says. "We did it because we want to thrive." By teaming with Sprint, he says, "We could really advance our market position in an aggressive way."
Keith Cowan, president of strategy for Sprint, agrees. "Together we can be far more competitive," he says.
Sprint's prepaid division, called Boost, currently competes with Virgin Mobile. Both offer nearly identical $50-a-month all-you-can-eat wireless plans, which have been gaining in popularity as the economy swoons.
The deal is expected to close by the end of the year. Once that happens, the intense rivalry between Boost and Virgin, which has been gaining steam as of late, will go away.
But the Virgin brand won't. Sprint will gain the right to use the Virgin Mobile USA name until 2046. "We think it's a superb brand," Cowan says.
So does Schulman, who will join Sprint to oversee the prepaid business. Schulman, a longtime wireless veteran, will also help set strategy.
He'll report to Sprint CEO Dan Hesse. Both men are alumni of the old AT&T, and they have known each other for more than 20 years.
Schulman says he's looking forward to teaming with his old pal. "We have a lot of confidence and trust in each other."
One thing that will change is Virgin Mobile's status as a mobile virtual network operator (MVNO). Virgin doesn't own a wireless network — it uses Sprint's. That meant Virgin never controlled its own destiny.
Schulman allows that the MVNO approach "has always been a difficult (business) model."
Analysts agree, noting that the MVNO approach has been tried — and abandoned — over the years by dozens of companies, including ESPN and MCI.
The decision by Virgin, one of the most successful MVNOs ever, to bail out illustrates how tough that business is, says Roger Entner, head of telecom research for Nielsen.
"This (transaction) is the swan song of the MVNO model," he says.
One big exception is TracFone, which currently has 12 million customers. "They are the only ones who have figured it out," Entner says.