In a surprise M&A today, Sprint Nextel (NYSE:S, news, filings) has agreed to buy Virgin Mobile USA in an all stock deal worth $483M. Virgin’s prepaid phones already run on the Sprint network, so the integration will be nothing like the Nextel disaster. In fact, little physical integration seems to be needed. Basically, Sprint has bought a new brand parallel to its rapidly expanding Boost Mobile offering, and doesn’t do itself any damage in terms of debt in the process.
What you think about the deal depends on what you think of the prepaid cell phone market. If you think it is the wave of the future and the best way to challenge Verizon (NYSE:VZ, news, filings) and AT&T (NYSE:T, news, filings), then this deal makes all the sense in the world. On the other hand, if you think the recent growth in the prepaid market is a creature of the recession that will never seriously challenge real postpaid cell phones, then you see this deal as Sprint paying for a chance to compete with itself for a niche it already has when it should be solving its other problems.
I tend toward the former view, mainly because of my experiences in China where prepaid is the only kind of phone. Carriers like postpaid because it gives them both visibility and control into how much will be spent on their cell phones. People like prepaid because it gives them the same damn thing, and whether we have a recovery or not over the next year I think people’s spending patterns are shifting in irreversible ways. As for what Sprint ought to be focusing on, it’s much easier to ride a new tiger than to wake up an old one, and prepaid may be the way to rehabilitating its reputation. Having two brands is no big deal, especially if you expect the prepaid market to not only grow but to bifurcate and develop its own segments and specialties.
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