Sprint Nextel has a new approach to reversing subscriber losses: If you can't keep customers, buy them. On July 28, Sprint Nextel said it was acquiring Virgin Mobile USA for $483 million in equity, including its existing 13.1% stake in Virgin. Sprint will also assume more than $200 million in debt.
The announcement came the day before Sprint announced it lost 991,000 subscribers on traditional wireless plans during the second quarter. That would bring to 5.7 million the number of subscribers lost by Sprint since late 2007. As of the end of the first quarter, Sprint had 49.1 million wireless customers.
In the second quarter, Sprint reported a loss of $384 million in $8.1 billion in revenues.
Buying Virgin is certainly a quick way to pick up 5.25 million retail customers. It may also be relatively cheap. Wireless carriers typically fall back on a combination of snazzy phones, catchy marketing, and a reputation for customer service and network coverage to attract customers. Sprint's reputation for coverage and service has suffered, making it harder for the company to keep customers. It takes $200 to $400 in marketing and other costs to sign up a new wireless customer. In Virgin, Sprint has paid about $140 per customer, according to FBR Capital Markets. Part of the reason Virgin went for so little is that it, too, has struggled to keep customers amid competition. In the first quarter, Virgin lost 133,292 users. "From Sprint's perspective, this makes infinite sense," says Rich Nespola, CEO of consultancy TMNG Global.
Gussying up for a sale?
Virgin is also partly owned by Korean telco SK Telecom and conglomerate Virgin Group. When the deal closes in late 2009 or early 2010, Virgin CEO Dan Schulman will lead Sprint's new prepaid division, comprised of Virgin and Boost Mobile, a division added when Sprint acquired Nextel. Shares of Sprint rose 1%, to 4.59, the day the deal was announced.
Craig Mathias, founder of consultant Farpoint Group, speculated that Sprint may be trying to add customers in the runup to a sale. Possible acquirers include Verizon Wireless, AT&T, and T-Mobile USA. Still, regulators may look askance at an attempt by Verizon Wireless or AT&T, the two largest wireless carriers, to buy Sprint, which ranks No. 3. And AT&T and T-Mobile own networks that for the time being rely on a different technology than that of Sprint.