* Sprint to pay 31 pct premium for Virgin Mobile USA
* Agrees to retire Virgin Mobile debt at close
* Virgin Mobile shares jump 23 pct, Sprint flat (Adds commentary, share price update)
By Sinead Carew
NEW YORK, July 28 (Reuters) - Sprint Nextel Corp (S.N) said on Tuesday it would buy out Virgin Mobile USA Inc VM.N in a deal that values the small wireless carrier at $483 million and pushes Sprint deeper into the low-end prepaid mobile market.
Sprint, which already owns 13.1 percent of Virgin Mobile, will pay a mix of shares and cash to buy the rest of the company from Richard Branson's Virgin Group [VA.UL], South Korea's SK Telecom (017670.KS) and public shareholders.
The No. 3 U.S. mobile service also plans to retire all of Virgin Mobile USA's debt, estimated to be no more than $205 million by Sept. 30.
Virgin Mobile USA shares jumped 23 percent or $1 to $5.21, close to the $5.50 per share that Sprint is paying in shares to public shareholders.
The price is a 31 percent premium over Virgin Mobile's closing price of $4.21 on Monday, though Sprint said the share swap ratio was subject to a collar of 1.0630 to 1.3668 Sprint shares per Virgin share.
While Sprint already rents space on its network to Virgin Mobile, some analysts were puzzled by its decision to buy the small carrier. Sprint already has its own prepaid unit, Boost, which offers consumers unlimited calls for a set monthly fee.
The deal will make Sprint more exposed to the toughest part of the prepaid market, in which customers pay in advance for calls on a per minute basis.
Analysts said the deal could be an indication that Sprint was having a difficult time turning around its main postpaid business, which serves high-value customers who pay monthly bills. Sprint is set to report quarterly results on Wednesday.
"I think Sprint is looking to delve deeper into prepaid possibly because the postpaid segment remains extremely challenged," said Soleil Nelson Alpha Research analyst Michael Nelson. "It could be indicative of how tough things are in the postpaid side."
Boost, Leap Wireless LEAP.O and MetroPCS PCS.N have seen strong growth in prepaid services that offer unlimited calls for a monthly fee.
Sprint, which has been struggling to stem customer defections from its own mobile service over the last few years, said the deal would increase its free cash flow but did not give a specific forecast for the impact of the transaction.
"Sprint will continue to be challenged, as Virgin Mobile has been in the last few quarters, to retain their pay-per-minute subscribers," said Nelson.
Sprint said it would manage Boost and Virgin as separate, complementary prepaid brands in one group led by Virgin Mobile CEO Dan Schulman, who will report to Sprint CEO Dan Hesse.
Sean Dalton, a partner at venture capital firm Highland Capital Partners and a board member of Sprint technology supplier Starent Networks Corp (STAR.O) said that once Sprint owns all of Virgin it should try to improve the profitability of that business by selling Virgin customers data services.
"Somewhere in the math of the deal there's a confidence they'll be able to upgrade some of Virgin's customers to the higher-value-added data services," Dalton said.
Otherwise it would not make sense for Sprint to increase its presence in the prepaid market, which Dalton described as a "marginal but not too interesting growth market."
"Who's to say there isn't an interesting prepaid data market down the road?" he said.
Another analyst, John Hodulik of UBS, described the deal as a "small positive for Sprint" and added that it helps rationalize the hugely competitive U.S. prepaid market.
"We believe this is good news for MetroPCS and Leap," Hodulik said in a research note.
MetroPCS shares were up 4 percent on New York Stock Exchange while Leap wireless shares rose 2.45 percent in afternoon trade on Nasdaq.
The deal follows the Virgin Group's strategy of exiting more mature wireless markets but keeping a brand presence.
Earlier in July, Virgin sold its 50 percent stake in Virgin Mobile Canada to Bell Canada.
Sprint said the share exchange ratio for the Virgin Group, which own 28.3 percent of Virgin Mobile USA, will be 93.09 percent of the exchange ratio for public stockholders, or about $5.12 per share, including convertible preferred shares.
After the deal closes, Sprint will pay $12.7 million to license the Virgin Mobile USA brand from the Virgin Group through the end of 2021. It will have the option to renew the licensing agreement until 2047.
Sprint will also pay Virgin another $50 million for net operating losses available to be used in future for tax purposes.
The share exchange ratio for SK Telecom, which owns 15.3 percent of Virgin Mobile USA, will be 89.84 percent of the exchange ratio for public stockholders, or $4.94 per Virgin Mobile USA share, Sprint said.
Sprint said it expected the deal to close in the fourth quarter of 2009 or in early 2010.
Virgin Mobile shares jumped 22.8 percent to $5.17 in morning trading on New York Stock Exchange, where Sprint shares were down 1.54 percent at $4.48. (Reporting by Sinead Carew and Tiffany Wu; Editing by John Wallace, Ted Kerr, Gary Hill)