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Virgin Mobile USA to buy hipster operator Helio

Can the cool survive?

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In a union of hipster-friendly mobile operators, Virgin Mobile USA has agreed to purchase Helio for $39m in stock.

Virgin Mobile offers low-cost, pre-paid services to the hip set, and now, it can give them something a little different: high-end subscription setups on phones with names like Ocean, Heat, and Drift.

"This strategic acquisition integrates Virgin Mobile USA's brand recognition, scale and extensive distribution with Helio's accomplishments in advanced handset and content offerings," reads a canned statement from Virgin Mobile USA boss Dan Schulman. "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."

According to Schulman, 20 per cent of the hipsters that abandon their pre-paid Virgin Mobile plans opt for post-paid contract plans, and he's sure that Helio can stem the flow. "We believe this new platform will be a powerful retention tool as we offer a unique and desirable postpaid alternative to our customers."

Helio is a joint venture between EarthLink and South Korean behemoth SK Telecom. Schulman and crew have agreed to give the two companies 13 million shares of Virgin Mobile USA stock, which had a value of roughly $39m when the bell rang yesterday afternoon.

As part of the deal, SK Telecom and Virgin Group, Virgin Mobile USA's parent company, will each provide a $25m dowry for this marriage of hip mobile brands. In return, SK Telecom gets a 17 per cent stake in the new combined operation.

Virgin has 5.1 million mobile customers in the US, and with the Helio acquisition, it will grab another 170,000. And these are much bigger spenders. According to Helio, it's average revenue per user (ARPU) is $80 a month, and in an interview with the Dow Jones New Service, Schulman said those 170,000 Helio customers are the equivalent of 700,000 pre-paid customers.

Both Virgin and Helio rent their US wireless bandwidth from Sprint Nextel. Today, Virgin also announced a new deal with Sprint that ties its cost per wireless minute to volume of network traffic it generates. The company believes that in adding Helio customers, it will reduce its cost per minute by 8 per cent in 2009, saving roughly $30m.

The new operation will need every penny. In the tightening US market, life is increasingly difficult for MVNOs (mobile virtual network operators) - outfits like Virgin and Helio who rent their bandwidth from spectrum holders. In 2006, Disney killed its ESPN Mobile Service after 11 months of life and $30m in loses, and last summer, it buried Disney Mobile after little more than a year.

With its pre-paid plans, Virgin has amassed a sizable customer base. But margins are thin, and the company is struggling to enlist new users. Net customer additions fell 94 per cent in the first quarter. Meanwhile, Helio is raking in some serious dough per customer, but those customers are relatively few.

The hope is that a combined operation can avoid the Disney jinx. ®

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