Virgin Mobile acquires Helio for $39 million

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Daily Crunch: Lab Partner Edition

Here’s the press release for now. There will be a conference call at 11am EDT that I will broadcast on CrunchGear live. More as we get it.

WARREN, N.J., June 27, 2008 – Virgin Mobile USA, Inc. (NYSE: VM), a leading national provider of wireless communications services, today announced that it has entered into an agreement to acquire Helio, a joint venture between SK Telecom and EarthLink, Inc. (Nasdaq: ELNK) providing highly advanced postpaid products and services with unique user applications. Under the terms of the agreement, Virgin Mobile USA will acquire Helio from SK Telecom and EarthLink for limited partnership units equivalent to 13 million shares of Virgin Mobile USA class A common stock, with a value of $39 million based on the closing price of Virgin Mobile USA’s class A shares on June 26, 2008.

The transaction is expected to close in the third quarter of 2008, subject to receiving regulatory approvals and satisfaction of other customary closing conditions.

Dan Schulman, Chief Executive Officer, Virgin Mobile USA, said, ”We believe that the acquisition of Helio and the related strategic investments by SK Telecom and Virgin Group are of enormous benefit to our business, both financially and strategically. The reduction of our long-term debt and the increase to our revolver will realign our capital structure, providing us with greater liquidity and increased flexibility to grow our business. At the same time, we will acquire an asset which will add to our scale, allowing us to reduce our network costs and assure that Helio’s customers are immediately profitable when brought on to our cost structure. We expect the combined elements of this deal will drive increased Adjusted EBITDA and free cash flow.”

Accelerating Virgin Mobile USA’s Growth
Upon closing, this transaction is expected to achieve a number of important steps for Virgin Mobile USA. Strategically, the acquisition of Helio allows Virgin Mobile USA to add a set of unique and differentiated data applications to its suite of products and services, greatly enhancing its offer across its customer base. Entry into the postpaid market will also give the Company access to approximately 140 million prospective customers1. Including reductions in Virgin Mobile USA’s network rates and an improved capital structure, this transaction is expected to be accretive to Adjusted EBITDA in 2008, excluding non-recurring transition costs, and to be accretive to Adjusted EBITDA and free cash flow in 2009.

With the acquisition of Helio, Virgin Mobile USA will gain an established and highly advanced postpaid billing and customer care platform. In addition, Helio has approximately 170,000 existing subscribers with an ARPU of approximately $80 and a handset inventory of approximately 85,000 units with a book value of approximately $17 million2. Acquiring Helio’s customers and expanding its offer portfolio is expected to increase Virgin Mobile USA’s volume of minutes and drive down the Company’s cost per minute under an amendment to its PCS Services agreement with Sprint (NYSE: S).

Schulman added, “This strategic acquisition integrates Virgin Mobile USA’s brand recognition, scale and extensive distribution with Helio’s accomplishments in advanced handset and content offerings. It provides us with a firm foundation to create a truly holistic, leading-edge product suite to service all of our existing and prospective customers. With about 20% of our disconnects currently going to postpaid products, we believe this new platform will be a powerful retention tool as we offer a unique and desirable postpaid alternative to our customers.”

Helio has been at the forefront in developing leading data services, in partnership with You Tube, Google and MySpace. Virgin Mobile USA will use this unique intellectual property to strengthen its competitive position in the prepaid, hybrid and postpaid markets while moving its handset lineup upmarket. Consequently, the Company expects to drive incremental growth in data revenues in the future.

Source: Nielsen Mobile, 2007. Total registered postpaid lines of 223 million; 60% spend less than $70 per month.
Helio Balance Sheet as of June 16, 2008. Fair value may be materially different upon fair value analysis post-close.
Strategic Investments Made at $8.50 per Share
Virgin Mobile USA also announced today that Virgin Group and SK Telecom will each invest $25 million of equity capital in the Company, creating an aggregate investment of $50 million. The investments will take the form of mandatory convertible preferred stock, convertible to Class A common stock at $8.50 per share, pending shareholder approval. The preferred shares will carry a four year maturity and a 6% annual dividend. Upon approval of Virgin Mobile USA’s shareholders, the preferred stock will convert into Class A common shares when the shares reach the conversion price or upon maturity.

Through its holding of limited partnership units and preferred stock, SK Telecom is expected to own the equivalent of approximately 17% of Virgin Mobile USA, and will take two seats on Virgin Mobile USA’s Board of Directors.

Jin Woo So, President, Global Business of SK Telecom said, “This transaction and our long-term, strategic investment in Virgin Mobile USA continue SKT’s strong momentum in the U.S. market, and will allow Helio and Virgin Mobile USA to realize significant synergies and strategic benefits. Virgin Mobile’s scale, strong brand power and expertise in prepaid with Helio’s leading technology, innovative services and experience in postpaid will together form a powerful new platform that will bring new value and flexibility to customers. We believe the strength of the business model will serve to enhance the value we built at Helio, and we look forward to a long-term partnership.”

Improved Capital Structure
Virgin Mobile USA intends to use the proceeds from these strategic investments by SK Telecom and Virgin Group to pay down a portion of its existing senior secured loan. SK Telecom and Virgin Group have also agreed to provide an additional $35 million and $25 million, respectively, to increase Virgin Mobile USA’s existing revolving debt facility, which will support the Company’s ongoing strategic growth. The additional revolver is expected to be used in part to fund debt and net working capital liabilities associated with restructuring and improving the efficiency of Helio’s ongoing operating costs, up to a maximum of $25 million. Following this additional investment, Virgin Mobile USA’s total revolving debt facility is expected to be $135 million. At close, approximately $15 million of the revolver is expected to be drawn to repay Helio’s outstanding debt and to fund one-time integration costs and transaction fees, resulting in an estimated undrawn balance of $75 million at close. The Company expects to use the revolver to fund up to an additional $10 million in restructuring and integration costs over the next 12 months, and for working capital as needed. Virgin Mobile USA intends to pay down $50 million of its existing senior secured loan upon close of the deal, which was approximately $269 million on March 31, 2008. Under the terms of its amended credit agreement, the margin on the outstanding balance of the senior secured loan will increase 100 basis points to LIBOR+550.

John Feehan, Chief Financial Officer of Virgin Mobile USA, said, “The strategic investments made by Virgin Group and SK Telecom will significantly improve the capital structure of our business by increasing our liquidity, and allow us to pay down $50 million of our senior secured loan. Combined with the Adjusted EBITDA accretion we anticipate, this reduction in debt will substantially increase our covenant headroom, while reducing our debt service on the senior secured loan by a net 17.7%. The improved capital structure, with the incremental cash flow we expect to generate, will provide us with a great deal more flexibility in funding the growth of the business and in servicing our debt.”

Operational Synergies and Improved Network Rates
Under the terms of the agreement, Helio will make significant cost reductions before the expected close of the transaction. Also after close, Virgin Mobile USA expects to make further improvements to Helio’s operating and customer acquisition expenses, through handset volume discounts and improving Virgin Mobile USA’s network rates through an amendment to its PCS Services agreement. In aggregate, Virgin Mobile USA anticipates Helio’s SG&A expense to be reduced by more than 70% by the end of 2008, with the majority of savings coming from the rationalization of distribution and headcount reductions. Virgin Mobile USA also expects to see significant cost savings as it centralizes the Helio offerings under the Virgin Mobile brand.

Virgin Mobile USA has also reached an agreement with Sprint to revise the terms of its existing network contract, and expects to achieve a minimum of an 8% reduction in its effective cost per minute in 2009, with further reductions over the next three years. Under the new amendment to the PCS Services agreement, Virgin Mobile USA’s cost per minute is tied directly to the volume of network traffic it generates, and will no longer be dependent on Sprint’s network costs. Virgin Mobile USA will achieve reductions to its per minute rate upon achieving certain targets for the volume of minutes used by its customers. This new volume discount structure allows Virgin Mobile USA additional flexibility in pricing, while substantially reducing the Company’s third-party risk. Additionally, effective July 1, 2008, Sprint will provide a $2.50 network usage credit to Virgin Mobile USA for each gross customer addition, with a cap at $10 million.

Top-Tier Customer Platform
SK Telecom and Helio have built a proprietary postpaid customer platform, with highly advanced web architecture. This platform features a broad range of fully integrated functionality for postpaid, prepaid and hybrid customer support, including real-time rating engine, billing platform, and credit review. It will allow Virgin Mobile USA to immediately enter the postpaid market, implementation for which on a stand-alone basis would require a minimum of 12 months.

Greatly Expanded Handset and Data Offerings
Helio has built its reputation by providing its approximately 170,000 customers with highly sophisticated data services, and Virgin Mobile USA will leverage these advanced applications along with Helio’s established postpaid platform, social networking content and feature-rich handsets to provide its customers with the latest in wireless products and services. This acquisition will allow Virgin Mobile USA to provide current and future customers with unique user applications on Sprint’s high speed EV-DO network, including Google maps with GPS, as well as integrated You Tube and MySpace applications.

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