Virgin Mobile USA (NYSE: VM) today announced that they will be acquiring Los Angeles-based Helio, a competitor backed by SK Telecom (NYSE: SKM) and EarthLink, for $39 million. The deal is complicated because it also includes cash and debt infusions by SK Telecom and the Virgin Group, and a favorable new network deal with Sprint (NYSE: S). Following the announcement, I interviewed CEO Dan Schulman, who called the merger “a transformative deal for the company.” Here are some excerpts:

SEE ALSO: Virgin-Helio: Execs Explain Tie-Up; Confirms Helio Store Closures And Other Reductions

Many MVNOs have not been successful in the U.S. Together, it seems like you will have a fighting chance. “It’s a fantastic transaction for three reasons: I think it greatly enhances our growth potential with the new capabilities we are getting; it provides us with significantly more scale and a number of cost benefits, and finally it greatly improves our financial strength and financial structure. When you pull all of these things together, it was a transformative deal for the company.

You say this deal wasn’t to compete with mainstream carriers, why not? “This is much more about an evolution of our product strategy, we are staying focused on youth market. The youth market continues to evolve as mobile becomes more central in their lives and everything they are doing. When you think about about when we entered the market six years ago, we were offered basic prepaid service with two handsets, we’ve evolved as we’ve scaled and as our target market evolved. Two years ago, we introduced hybrid offers, which are monthly plans without a contract, and now over 30 percent of base is on monthly plans. This was the next logical extension for us. We are finding in conversations with our retailers, we are beginning to see more movement up market to more advanced handsets, and with those advanced handsets, come more data services capabilities, and we wanted to make sure we could offer a choice to service our customers through the entire life cycle. That was the main reason why so attracted by technology platform and the capability sets that Helio had built. They are terrific, and fully integrated types of applications that we would like to take and port to our base, creating Helio light versions for those who don’t want to move up into a EV-DO or advanced handset. It isn’t that we won’t be selling post-paid to the marketplace, but we are taking a measured approach to it.”

I was impressed that you said Helio needed a average revenue per user of $80 to be profitable, but you said you could get it down to between $40 and $70, is that right? “Yeah, that’s exactly right. The network deal that Helio had with Sprint was on a per subscriber basis and for them to have a shot at profitability, really forced them to focus on the very highest users, and our network structure is a much more flexibly one with Sprint, and our network costs are much lower on a per unit basis, as a result, we are going to be able to target a much wider segment of the market—really the sweet spot of the prepaid market in the $40 to $70 range. To the point you made before, on where MVNOs are, I think you are right, without the scale it’s very difficult for an MVNO, or any company coming into the business to really thrive in a competitive marketplace. You need to have the right cost structure and extensive distribution, and what this deal did was bring about the best attributes that Helio was able to develop and take many of the best attributes of Virgin Mobile and merry them together in order to increase scale and drive cost efficiencies and strengthen our financial position. All of those things help us to accelerate our growth potential over and beyond our capabilities.”

What other cost reductions are you expecting Helio to accomplish before the sale? I think you are asking Helio to shut down their stores and kiosks, which I’m assuming will aid in having a lower cost distribution network? “That’s exactly right. Because they could not break into national distribution, they had to move into third party, and so their cost of acquisition was quite high. We aren’t only shutting down the quite unprofitable stores and kiosks, but they are also reducing the number of third party distribution to focus on the most profitable stores. Helio has done a great job in the last several months in getting their cost structure in place and bringing down bad debt, bringing down their churn, and you see quite a nice progression of that month over month, and they have implemented credit standards now that are in line with industry standards. They continue to bring on gross adds and we expect them to do that, and we are interested in the quality of the customers they are bringing on.”

And, they’ll reduce their headcount? We expect their total headcount to be 200 by the end of the year, and they have about 550 folks right now. We have 450. And you have more than 4 million more customers? “Apples to apples, yes that’s right. I’m a big believer that you have to have the right cost structure in order to have a viable and growing business because if you don’t have that, it doesn’t matter how fast you are growing, eventually you will implode. Yes, you have to grow to get to that scale, but you have to have a lot of cost discipline. We do our best at that part of it, and I think as we’ve grown, we haven’t grown headcount in the last year, or so. As we’ve added about 700,000 in the last year and a half, we’ve kept headcount flat and slightly down.”

What’s the relationship with SK Telecom going forward beyond the two board seats? “We expect the relationship to SKT to be a strategic one going foward. Part of our agreement includes the sharing of IP, and they will have two seats on board, and be the second-largest shareholder of Virgin mobile. That’s one element of this deal that I’m quite delighted about.” What kind of IP does that include? Yes, applications and partnerships, and all of that.”

What’s EarthLink’s stake? “2 percent.”

It sounds like you got a pretty good deal given that hundreds of millions of dollars were invested into Helio? “We think it was a very compelling acquisition for us. We get a customer base we estimate in our cost structure, generates some $30 million in EBTIDA. We get their handset inventory worth $17 million, and their technology platform that would have cost us $25 million and take us over a year to build. In addition to all the investments that came into the business—Virgin and SK put in $110 million into Virgin Mobile—$50 in equity at $8.50 a share, and $60 million in increased revolver for us to have flexibility to grow the business. And Sprint put in $40 million in a way, by giving us $10 million in gross adds, and $30 million reduction in network costs. All-in, I would say all parties are quite excited about the deal, I know we are.”

What will be the impact to the customers? “No, none. They get to keep their handsets and keep their services and we will provide more and more compelling functionality.”

Were they close to bankruptcy, or did they have adverse relationships with their partners? “No.”

What about the Ocean 2. Is that coming?“We intend to continue the development of iconic handsets and we are looking at the entire roadmap, and seeing which handsets make the most sense. I think you can expect to see what Helio is known for—great handsets, and great UI, combined with fully integrated data applications.”

Will any of the Helio management team come over to Virgin?“There will certain members of the team that will come over, who have certain area of expertise, and we will take advantage of those skillsets.” Will Sky Dayton have a role in the new company? “No, he won’t have a role going forward.”