Virgin Mobile to buy SK Telecom's Helio

NEW YORK (Reuters) - Virgin Mobile USA Inc VM.N said on Friday it will buy SK Telecom Co Ltd's (017670.KS) money-losing U.S. mobile unit, Helio, for $39 million in stock, hoping a combination of their youth-focused services will help weather a slowing economy.

South Korea's SK will also invest an additional $25 million in Virgin Mobile, as will the Virgin Group VA.UL, which jointly owns Virgin Mobile with Sprint Nextel Corp (S.N).

Helio is 69 percent-owned by SK and 28 percent-owned by EarthLink Inc (ELNK.O).

"I think the key to success in this business, in a word, is scale," Virgin Mobile USA Chief Executive Dan Schulman said on a conference call with analysts.

Virgin Mobile serves more than 5 million customers. Growth has been slowing due to the weaker U.S. economy and competition from AT&T Inc (T.N) and Verizon Wireless, a joint venture between Verizon Communications Inc (VZ.N) and Vodafone Group Plc (VOD.L).

Helio, which has about 170,000 subscribers, has also struggled, leading some analysts to believe a combination of the two could be a good fit. Both companies target young consumers and rent space on Sprint's network.

But others saw the deal as merely a combination of two weak players in the U.S. mobile industry.

"I'm somewhat skeptical," said Todd Rethemeier, an analyst at Soleil Securities. "It's one company that's struggled to differentiate itself in the market in recent quarters buying a company that's never been able to differentiate itself."

Rethemeier said it would also be risky for Virgin Mobile to enter the postpaid, subscription-based wireless market via Helio, as it would be going up against bigger competitors in AT&T and Verizon. Virgin Mobile now focuses on the prepaid market, where customers pay for services in advance.

Virgin Mobile shares fell 6.69 percent to $2.79, while Sprint shares rose 3.28 percent to $9.13 in afternoon trading. EarthLink shares fell 2.55 percent to $8.79.

COST CUTS

Virgin Mobile expects the deal to close in the third quarter and said it will boost its 2008 adjusted EBITDA (earnings before interest, tax, depreciation and amortization), excluding one-off transition costs.

It said it plans to cut Helio's selling, general and administrative spending by more than 70 percent by the end of 2008, in part through job cuts.

Virgin Mobile also said the deal had helped it negotiate lower network fees from Sprint. It expects a reduction of at least 8 percent in its costs per minute in 2009, with further reductions over the next three years.

Virgin Mobile said it is also set to receive funding to boost its revolving debt facility, with SK and Virgin Group providing an additional $35 million and $25 million, respectively, for that purpose.

Schulman said such measures had helped to more than double its liquidity.

"All of those things give us substantial flexibility to grow our business in the years ahead," he said.

Virgin Mobile will acquire Helio from SK and EarthLink for limited partnership units equivalent to 13 million shares of Virgin Mobile Class A shares, which had a value of $39 million based on Thursday's close.

As part of the deal, SK Telecom, South Korea's top mobile operator and Virgin Group will buy mandatory convertible preferred stock with a four-year maturity, which is convertible to Virgin Mobile Class A shares at $8.50 per share.

(Additional reporting by Yinka Adegoke, editing by Jeffrey Benkoe and Andre Grenon)