Big numbers for Virgin Mobile

IF THERE is one recurring theme in the career of Sir Richard Branson it is that he knows how to sell.

Whether unloading his music business to the Japanese, selling half his airline to the Singaporeans, floating his company on the Stock Exchange first time round, selling half his financial services business, or half of Virgin Trains, or disposing of a raft of smaller businesses, he has consistently shown an uncanny ability to squeeze a lot of money out of the buyers.

Profits don't seem to come into it. Branson sells them the image, the Virgin brand, and he always seems to find a taker.

He is at it again now with the forthcoming public flotation of Virgin Mobile. Today's pricing range suggests a value on the business of up to £1bn.

That, however, is an enterprise value and includes £311m of debt. Nevertheless, it still prices the equity at around £700m, which is on a par with what he got for his airline stake but, if inflation is taken into account, rather less than he got for the the music business.

But the mobile business does not seem to make very much money yet. A recent renegotiation of the deal with T-Mobile, the network Virgin subscribers are plugged into, means the figures in the prospectus will be pro forma - which means estimated rather than audited.

That said, the whisper is that Virgin mobile is shooting for £100m of earnings before interest tax and depreciation (ebitda). A £1bn price tag would therefore imply a multiple of 10 times ebitda.

The other established mobile operators that own their networks generally sell at between five and six times earnings, which makes Virgin Mobile almost twice as expensive as its competitors.

A premium over the competition may be justified because renting space on the T-Mobile network means it does not have huge capital spending needs. But it also means margins are thin. And the business has its share of uncertainty, in particular the looming need to migrate its customers to 3G.

This may well go seamlessly, but Vodafone's recent disastrous experience in Japan serves as a warning that these things can never be taken for granted.

In future, too, it will have to fund more of its marketing, which until this year was helped by a £4 per simcard marketing contribution from T-Mobile, which analysts reckon was worth £80m in a full year.

This is part of the deal that has now been unwound, so it points to a significant increase in costs in years to come, particularly if the business stays so competitive.

But fans of the issue say it is hugely cash-generative, and if it simply ran off its existing customer contracts with no more growth it would still throw off £1bn of cash in years to come.

That is a truly remarkable achievement in such a short time. It seems like only yesterday that Branson launched his mobile business by posing in Leicester Square on a bitterly cold day with some rather under-dressed models. At the time no one really understood what he was on about. But they know now.

Once again he proved the power of his brand and how his reputation for customer service can create value. He deserves recognition for that. It is just that £1bn worth of recognition seems rather on the high side.

Cap tip

IT WAS brave of Mary Francis, director-general of the Association of British Insurers, to use her speech at the chartered accountants' annual conference to tell the auditors to their faces what she and her members think of their desire to limit the liability of auditors.

She could scarcely have been more direct. The ABI did not believe capping would do anything to improve the quality of the audit but, conversely, could create moral hazard and put auditors under less pressure to deliver quality.

Capping would not, if confined to Britain, do anything to protect against a scandal such as energy trader Enron, causing another accounting firm to collapse. And it is unlikely to increase competition as long as the firms use audit as a loss leader to get more lucrative consultancy business.

No sooner had she sat down than, coincidentally, the Government announced that it has asked the Office of Fair Trading to look at the competitive implications of limiting liability. This spurred almost every auditing firm of size to rush out a Press release welcoming the move.

Someone needs to remind the auditors they are a service business. The ABI represents their customers. The customers have said clearly they don't want a cap. That should be the end of the matter.

Auditors need to remember whom they are there to serve.