Virgin Mobile USA Inc said yesterday that it plans to buy Helio LLC, the American mobile arm of South Korea's SK Telecom Co Ltd., for $39 million in equity.

Helios was launched in May 2006 as a joint venture of internet service provider EarthLink Inc. and SK Telecom to bring the advanced features of South Korean phones to the US market. However, it has been unable to deliver on its promise and had been accumulating losses and losing customers of late. The number of subscribers currently stands at 170,000, down from 200,000 a year ago.

Since Helio was not a publicly traded company, data on its financials have been scant, but it has contributed to losses at EarthLink. Just last year SK Telecom invested an additional $270 million in Helio, cutting EarthLink's ownership share to about 22 per cent. Friday's release said the company had an unsold inventory of 85,000 handsets, worth about $17 million.

Virgin Mobile, which is partly owned by Richard Branson's Virgin and Sprint Nextel Corp, serves more than 5 million customers. Its growth has been slowing amid growing competition from rivals and a weaker US economy.

In contrast to traditional mobile service operators like Vodafone, Virgin Mobile is a mobile virtual network operator (MVNO). Rather than owning their own network, MVNOs buy wholesale airtime from other carriers. It's a business model that has proved exceedingly difficult to profit from. Amp'd Mobile, ESPN Mobile and Disney Mobile have all shut down.

Virgin Mobile indicated that it will keep operating Helio's advanced data services and its contract-based service plans. Virgin Mobile's own plans are prepaid and lack contracts. But the Helio brand will likely be phased out, said Dan Schulman, Virgin Mobile's chief executive. It might be kept in the Korean-American market, where Helio is popular.

Schulman noted that a fifth of its customer defections leave to switch to a contract plan. Those customers tend to spend more money than average each month. The Helio plan gives the customers somewhere within Virgin Mobile to move to.

"(The deal) is enormously beneficial for us," Schulman said. "It's a natural evolution to offering a complete portfolio."
The acquisition, which consists of Virgin Mobile handing over 13 million shares of its Class A stock to SK Telecom and EarthLink, combines Virgin's 5.1 million customers with Helio's base of 170,000 subscribers. Schulman said that those higher value customers are worth 700,000 typical prepaid customers.

Virgin Mobile expects Helio to immediately begin contributing to results when the deal closes, Schulman said, noting Helio's customer base can generate earnings before interest, taxes, depreciation and amortization of $30 million. Helio has yet to turn a profit, but has been aggressively cutting costs over the past year.

Virgin Mobile also expects to benefit from lower operating costs. Both companies buy network capacity from Sprint Nextel Corp. (S), and don't have to worry about differing technology. As part of the deal, Virgin Mobile's network costs are expected to fall and save the company $30 million next year. Sprint is providing another $10 million in network benefits in the form of credit for every gross customer addition, he added.

In an additional investment, Virgin Group, Virgin Mobile USA's parent company, and SK Telecom will each invest $25 million of equity capital in Virgin Mobile USA. The $50 million investment will be in preferred stock, convertible to Class A common stock, at $8.50 a share. The investment will bring SK Telecom's total ownership of Virgin Mobile USA to 17 per cent.

SK Telecom, South Korea's top mobile operator, said in May it was in preliminary talks with Virgin Mobile about a deal involving Helio.

Virgin Mobile's stock recently fell 21 cents, or 7 per cent, to $2.78, while SK Telecom fell 21 cents, or 1 per cent, to $20.65. EarthLink fell 27 cents, or 3 per cent, to $8.75.