Entries from June 2008 ↓

Deal Analysis:

Its always advisable to buy a running business than to build one from scratch — where possible. Virgin has done that in this case.

It would have cost Virgin about $25 million to build/replicate this platform from scratch. Helios has it up and running. $39 is like a 50% premium, and if you consider time and execution risk, that’s a good deal.

Given that this is electronics and mobile business where costs keep falling and trends keep changing, one of the things that Virgin Mobile has to rapidly do is to reduce the handset inventory of 85,000 devices valued at $17 million. If they are not sold off soon, they will probably be worth $7 million a year from now.

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Deal Details:

The rumored VirginMobile/Helio deal is now a reality. Virgin Mobile USA will acquire Helio from SK Telecom and Earthlink for an equivalent of 13 million shares of Virgin Mobile stock with a value of $39 million. Virgin Group and SK Telecom each will invest $25 million in equity capital in the company. SK will have a 17 percent investment in Virgin Mobile and two seats on the Virgin Mobile board of directors. The deal is supposed to close in the third quarter.

Virgin says that the Helio deal will be good for the MVNO because it will allow the company to offer differentiated data applications and enter the postpaid market. Helio has approximately 170,000 subscribers with an ARPU of about $80 and a handset inventory of 85,000 devices valued at $17 million. By acquiring Helio, Virgin expects to increase its volume of minutes and therefore drive down the company’s cost per minute network usage deal that it has with Sprint. On a conference call this morning with investors, Dan Schulman, CEO of Virgin Mobile USA, said that Virgin’s agreement with Sprint is no longer tied to Sprint’s costs but instead is based on total revenues that Virgin delivers via airtime minutes and megabytes of data. Schulman says he expects a minimum 8 percent discount on network costs in 2009 with further reductions in subsequent years. “This reduces our third-party risks…and allows us more margin,” Schulman said.

Virgin also will acquire Helio’s postpaid platform, which Schulman estimated would cost the firm between $20 million and $25 million to build if Virgin wanted to try to replicate it from scratch. Schulman says that this platform is strategically beneficial to the firm because 20 percent of the firm’s disconnects come from customers going to postpaid products so he believes that offering postpaid service will be a retention tool for Virgin.

Nevertheless, Schulman asserts that Virgin doesn’t want to attack postpaid incumbents with a postpaid offering. Instead he believes that the integration with Helio will allow Virgin to reduce its churn and appeal to higher spending customers “We will focus on the quality of our base, rather than growing aggressively,” he said. “We have modest postpaid expectations.”

Schulman added that Helio will cut its sales and distribution costs before the acquisition closes. That means the company will shut down its five retail stores and kiosks. Helio’s store in Denver had closed.

Virgin will use the investments from SK Telecom and Virgin Group to pay down its debt. Both SK and Virgin also will provide an additional $35 million and $25 million respectively to increase Virgin Mobile’s revolving debt facility to support ongoing growth.

For more: See this press release

How many times have you made payments/investments for promised results which never happened?

Well, I have made that mistake a few times over the last 2 decades, and each time, the learning has improved.  And the success rate of deals has also improved.

There are professionals of all types – who will ask for upfront money – and then you are stuck. It happens in every possible industry. It is very common and we see many cases regularly. And hence this post.

Whether it is a simple project, or a real estate, or a business, or anything else – if you are planning to spend money on it – please make sure that there is a payment schedule that is tied to milestones, mutually agreed between you and the other party.

Here’s an example of Milestone Based Payments – it ensures that the other party will continue to work for the results.

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Novartis buys drug firm Protez for $400m 

ZURICH, 5 June 2008: Novartis has bought US-based Protez Pharmaceuticals in a deal worth up to $400 million, giving it rights to an antibiotic which could be used to fight superbugs such as MRSA, the Swiss drugmaker said.

“The acquisition of Protez Pharmaceuticals provides rights to PZ-601 and further strengthens specialty medicines development portfolio in hospital infections,” Novartis said. Z-601 is a novel broad-spectrum antibiotic in Phase II development against potentially deadly drug-resistant infections, including MRSA and ESBL strains, Novartis said.

Novartis will initially pay $100 million for privately held Protez, with a potential for up to $300 million of additional payments depending on the success of PZ-601, the company said. The emergence of hospital superbugs such as MRSA, which are resistant to existing medicines, has increased the need for alternative treatments and re-focused attention on antibiotics.

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A point to note is that milestone based payments will result in a larger number for the total project cost/ business valuation – compared to upfront payment – but in my experience that extra is well worth the reduced risk, especially in transactions with strangers or new business partners.

Despite best effort, there are unknowns in the business environment which will come into play as time progresses – and Milestone Based Payments give you the ability to adapt better.

Best Wishes,
Shankar/ Director, Alpha Neuron