Entries Tagged 'Telecom' ↓

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

The U.S. government will announce this month the carrier it has selected to supply voice, data, video and wireless services through 2017. The $20 billion project, called Networx, is split into two contracts: (1) Networx Universal includes VPN, VoIP, frame relay and ATM services, and (2) Networx Enterprise which will focus on emerging IP and wireless services.

The US GSA (General Services Administration), which is the govt agency overseeing the project, will announce the winner of Networx Universal this month and the Enterprise component winner in May.

Here are the bidders for Networx Universal (essentially, the telecom market…and it couldn’t be any other way): AT&T, with Bechtel, Cingular Wireless, Electronic Data Systems, Global Crossing, GTSI, Northrop Grumman and SRA International. Qwest, with Akamai Technologies, Alcatel-Lucent, Bearing Point, Hawaiian Telecom Services, Science Applications International and Wire One Communications. Sprint Nextel, with Hughes Network Systems, Intercall and Lockheed Martin. Verizon Business, with Comtech Telecommunications, G2 Satellite Solutions, HP, Proxim Wireless Networks, WilTel Communications/Level 3 and Verizon Wireless.

Those same teams are bidding for the enterprise contract, but an additional team led by Level 3 is also bidding for it. For more on Networx, read this article from Wireless Week. What’s going to happen? Level 3 doing their own show for Networx Enterprise could make their team weaker for it. It is very likely that (1) and (2) will go two different teams.

The execution risk of going with one combination alone is high, plus the added benefit is that if two teams are chosen, almost half the telecom industry will be working with each other on this project, allowing GSA a strong control on evolving telecom standards. Who’s likely to win Networx Universal?

While all teams are technically covered, the AT&T team has EDS, which has speciality in doing such ultra long-term projects, with both good and bad results. And there is Northrop Grumman to counter Lockheed Martin. So this team looks most attractive. Time will tell. But whichever companies win, they will have to help the various agencies make the transition from one provider to another, a process that was difficult when the government last bid its telecom work for FTS 2001.

Such a transition will never be painless, and the extent of effort planned in this giant transition could make some proposals more expensive and pragmatic than others, but less attractive financially. We will see what the GSA decides for itself.