Virgin Hopes Helio Can Slow Customer Defections (VM, ELNK, SKM, S)

If you have followed the launch of the "cool cellular" service called Helio over the last year or so, you might be among the few who remembered it even launched.  This was the joint venture between Earthlink Inc. (NASDAQ: ELNK) and SK Telecom (NYSE: SKM).  Richard Branson’s Virgin mobile USA Inc. (NYSE: VM) has decided it might be able to to turn this into shinola, and if it doesn’t work out it will have ended up being a tiny gamble.

Virgin is acquiring Helio for nearly $39 million.  But it is acquiring the company with 13 million shares of stock.  The interesting part here is that Virgin may actually get to lower its network costs in the carrier agreement with Sprint (NYSE: S).

Helio will give Virgin Mobile approximately 170,000 existing subscribers with an average revenue per of close to $80.00.  It will also give it a a handset inventory of some 85,000 units with a book value of $17 million.  With 20% of Virgin’s customers migrating to post-paid products, the company hopes this will add to the retention.

Virgin Group and SK Telecom will each invest $25 million of capital into the operations in the form of mandatory convertible preferred stock with an $8.50 per share conversion price. These will have a four-year maturity and a 6% annual dividend, and SK Telecom will own a combined equivalent of approximately 17% of Virgin Mobile USA and will take two seats on Virgin Mobile USA’s Board of Directors.

EarthLink shares are down over 3% today at $8.72 as this will likely result in a charge for the company.  Virgin Mobile USA shares are up less than 1% at $3.00 on the day.

Jon C. Ogg
June 27, 2008