NTL’s pursuit of Virgin Mobile began last December when NTL offered 323 pence ($5.61) in cash for each Virgin Mobile share, a 3.9% premium on Virgin Mobile’s closing price the day before the deal was announced.
The deal had been eagerly backed for the past four months by Virgin Mobile’s largest shareholder, British entrepreneur Sir Richard Branson, who has a 72% stake in the operator. However, the small premium did not impress Virgin’s minority shareholders who between them controlled 28.5% of the operator, and they quickly rejected the initial offer. Takeover talks have dragged on since January.
Now Virgin Mobile shareholders will receive 372 pence ($6.53) per share, which represents a premium of 19.6% to Virgin Mobile’s share price on December 2, 2005. Shareholders can also accept 389 pence ($6.83) in NTL shares or a combination of 67 pence ($1.17) cash and 311 pence ($5.46) in NTL shares.
Virgin Group will accept GBP123 million ($216 million) in cash and will become NTL’s largest single shareholder with a 10.6% stake. It will also be entitled to a seat on the NTL board. In addition, Virgin Mobile will provide NTL with a new chief marketing officer.
It is not hard to see why Virgin Mobile is so desirable to NTL. The Trowbridge, UK-based mobile operator has an incredibly strong brand name, and it is also recognized as having excellent customer service. These two points have been well-documented problem areas for NTL for years now.
Part of the deal includes the licensing of the Virgin brand from Mr Branson for 30 years. This allows NTL to use the strong Virgin brand name in the UK and Ireland at a cost of approximately GBP9 million ($15.8 million) per year.
Although no timeframe was given for the rebranding exercise, it is only expected to start at the end of this year. In the meantime, Virgin Mobile will remain a separate entity while NTL concentrates on integrating the cable operations of rival Telewest Global, which it acquired for $6 billion.
In the past there had been concerns over the cable operator’s financial situation, as NTL went into Chapter 11 bankruptcy protection during the downturn, while Telewest underwent a restructuring that saw its bondholders receive 98.5% of the company’s shares.
Virgin Mobile, on the other hand, has been a successful operation in a fiercely competitive UK market-place. Mr Branson set up Virgin Mobile in 1999 as a virtual network operator using the mobile network of T-Mobile International AG. It now has 4.3 million customers in the UK.
Virgin Mobile is generally regarded at the world’s largest VNO. It has similar agreements in the US, Australia, Canada, and now in France, where it agreed to use the mobile network of Orange. Competition in the French market is limited, with only three national mobile operators, and Virgin Mobile aims to attract one million customers within three years by offering free SMS messages for yearly contract customers, and undercutting the competition with prepay minutes at 29 pence ($0.50), against the average rival charges of 33 pence ($0.57) to 38 pence ($0.66).
Mr Branson’s mobile phone business has been long been viewed as the operator of choice for the youth market, and while it is true that most of its customers are pre-pay and not contract, over 50% of its customer base is aged over 35 years old. This makes Virgin Mobile an even more attractive proposition for NTL, as these customers are likely to be home-owners, and therefore prime targets for one or all of NTL’s ‘quad-play’ services: mobile phone, fixed-line, pay TV, and internet access.
NTL believes that convergence is the future, and said it already has a 32% penetration rate for its triple-play offering (fixed-line telephony, broadband, and pay-tv), and now expects this to increase with quad-play. It said it also expects increased customer loyalty and decreased customer churn figures, as customers tend to remain with a supplier that can offer a range of services.
The acquisition will cause a headache for the likes of UK satellite broadcaster British Sky Broadcasting Group, and former UK incumbent BT Group, each of which has its own triple-play aspirations. At the moment NTL is the second largest fixed-line telecoms provider (after BT) in the UK with 4.3 million subscribers. It also has 3.3 million pay TV subscribers and 2.8 million broadband users.
NTL’s acquisition of Virgin Mobile does offer some exciting possibilities, including the ability for Virgin Mobile users to switch their mobile handsets to NTL’s IP fiber-based network once inside their ‘home zone’ in order to benefit from cheaper call rates, a concept already used by the Fusion phone from BT Group.
The deal also raises a number of worries. First, NTL only closed the acquisition of Telewest in March, and the company has a mammoth task on its hands integrating the two operations and two networks while at the same time rolling out services such as high definition television from this summer.
NTL has admitted that for the time being Virgin Mobile will continue a separate entity with its existing management team, and will only be integrated into the group when its management deems the time is right. Virgin Mobile will maintain its own billing system, and customers expecting one bill from one service provider for four different services will be disappointed.
The final concern centers over the UK market, which is fiercely competitive. NTL has thrown the gauntlet down at the feet of BT and BSkyB, both of which have greater geographic reach in the UK because they are not constrained by operating in areas where a cable network is available. BSkyB also has a slight problem here because its broadband offering is limited to the geographic reach of Easynet’s fiber network. However, Sky is installed in over eight million UK homes, and this gives it a tremendous chance to start offering other services such as broadband. BT likewise has, some would argue, a presence in nearly all of UK homes.
NTL will certainly have its work cut out to integrate the respective divisions and networks, and the prospects of combining three billing systems into one are likely to cause technical headaches.
That said, NTL expects to close the Virgin Mobile deal at the end of June, and the rebranding under the Virgin name should start at the end of the year.
