FTC OKs Sprint-Virgin Merger

Sprint Nextel (S - Analyst Report) reportedly received approval from the Federal Trade Commission for its acquisition of Virgin Mobile USA (VM). With this antitrust clearance, the company has successfully crossed the first major hurdle in taking over the prepaid wireless reseller. The deal, now subject to consent of Virgin shareholders and other regulatory sanctions, is expected to close in late 2009 or early 2010.

Last month, Sprint announced the acquisition for $483 million and committed to retire all outstanding debt of Virgin on a successful closure of the transaction. Sprint currently owns 13.1% stake in Virgin Mobile USA (a joint venture between UK’s Virgin Group and Sprint), which uses the company’s network to offer prepaid wireless services to roughly 5.2 million subscribers in the U.S.

Sprint remains significantly challenged by the dismal economic environment which has contributed to the precipitous decline in subscriber base and associated revenue. In contrast, its larger peers Verizon (VZ - Analyst Report) and AT&T (T - Analyst Report) have succeeded in expanding their customer bases. Sprint’s core post-paid business continues to shrink after a net loss of about 2.2 million customers in the first half of 2009. However, this is being partially offset by healthy growth in the prepaid subscriber base.

The company currently offers prepaid services to approximately 5 million customers through its Boost Mobile prepaid subsidiary. Sprint’s $50 monthly unlimited prepaid plan is gaining significant traction, facilitating subscriber retention and superior average revenue per user in the prepaid segment. In order to improve subscriber retention, the company has recently expanded this service plan across its existing wireless network platforms.

Moving forward, we feel that the prepaid mobile market will continue to serve as a significant catalyst for Sprint. The Virgin deal will strengthen the company’s foothold in this rapidly growing market as it leverages two complementary brands (Boost and Virgin) to target various customer demographics with distinctive service offerings. This will also help Sprint to compete with other prominent unlimited prepaid players such as MetroPCS (PCS - Analyst Report) and Leap Wireless (LEAP - Analyst Report).

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