Virgin Mobile numbers under scrutiny

SIR Richard Branson is mulling a £1bn stock market float of his Virgin Mobile phones business this summer. A lot of personal credibility is at stake for Britain's best-known billionaire. If he does float Virgin Mobile, it will be his first company to be publicly listed on the London market since he took Virgin Group private in 1988.

Is this Branson's greatest wheeze yet or will the City hang up on the deal? A float would mean that the mobiles business will come under a harsher spotlight.

Virgin Mobile does not have its own network, which is a bit like setting up in the grocery business without any shops. Instead, Branson kept his costs down with a 50/50 venture with Germany's T-Mobile, which allows him to piggyback on to its network. Handsets are sold through Virgin's High Street music stores and other outlets.

The path to a float has been cleared by an out-of-court settlement this year after a long dispute with T-Mobile, which will be entitled to a chunk of the spoils if there is a float.

Analysts at advising banks JP Morgan, Investec and Morgan Stanley were briefed in mid-May. They should come up with a clearer idea this month of whether the business is worth the £1bn price tag being mooted.

Branson appears to have worked his magic in the mobile market, thumbing his nose at jaundiced competitors. When he announced plans to take on Vodafone and Orange with a no-frills, pre-pay phone service in late 1999, industry rivals predicted that it would be a repeat of his ill-fated forays into cosmetics and bridalwear.

But against the odds he has attracted more than 4m subscribers in just over four years through a mix of keen pricing, cheeky advertising and a strong brand.

Profits forecast

VIRGIN Mobile is now Britain's largest virtual operator and Branson has exported the business model to America and Australia. But is it really worth £1bn?

The business is still making a loss, albeit a shrinking one. In its most recent set of accounts in 2002, it was in the red by £7m before tax, down from £59m a year earlier. Sales soared 65% to £288m and it has already begun repaying a £115m bank loan.

Since then, Virgin Mobile has carried on growing. It forecasts an operating profit of £100m this year. If so, a £1bn valuation would be just 10 times its earnings, par for the course for the sector.

So far so good - but other factors are important in assessing the value of a mobile phone company, including how much each user spends. Analyst Jim McCafferty, at Seymour Pierce, says: 'It's no good having 12m subscribers if they only make a call once a month.'

Branson's customers, who sign up for pre-pay deals that keep bills in check, tend to be less valuable than those of Vodafone or mmO2, which have lots of subscribers on lucrative contract deals.

An average Virgin Mobile customer spends £135 a year on calls and text messaging. That is almost 60% less than Vodafone's UK customers and 50% less than mmO2's.

Yet a £1bn price tag suggests a pretty ambitious value is being attached to Virgin's customers compared to its rivals. Valuing customers at the same level as mmO2's would suggest the business is worth nearer £800m although that calculation does not take into account the fact that Virgin's cost base is lower than its competitors.

Attracting customers has never been a problem, given the power of the Branson brand. Virgin Mobile attracted another 257,000 in the first three months of 2004. But is it keeping them on board?

Defining an 'active subscriber' is a tricky business. Telecoms regulator Ofcom says operators should discount customers who have not made or received a call in the last three months.

But Virgin has stuck with a 12-month cut-off, leading to allegations that thousands of users have been double-counted.

One rival telecoms executive said Virgin customers, who are all on pre-pay deals, could dump their existing phones once they have used up their credit and upgrade to a new one. 'Under Virgin's methodology, that would count as two active subscribers,' he explains.

Assuming a 25% 'churn' rate - the proportion of subscribers an operator loses every year - rivals claim that as many as 1m of Virgin's customers effectively don't exist.

Virgin Mobile says it has 'never seen fit to change' how it counts its customers, but analysts say it might have to do its sums more conservatively if it plans a public share offering.

Potential problem

ONE big advantage of Branson's business model is that, without its own network, it has no need to spend billions of pounds to prepare for third-generation services that will enable users to use the internet and download video clips quickly.

But one potential problem is that, as part of its settlement with T-Mobile, Virgin is locked into a fixed contract to buy airtime from the German group. That could leave it in a straitjacket if rivals embark on a price war.

With fresh competition looming in the shape of Tesco and 3, that is no idle fear. Even easyJet founder Stelios Haji-Ioannou is sniffing round the sector to launch his own virtual operator, though he has failed to find a network partner so far.

It is not surprising that some in the City are scrutinising Branson's mobile business. His business empire is opaque, with interests spread over more than 200 privately-held companies, often with different financial year-ends and sometimes owned by offshore trusts.

The tycoon is wary of the UK stock market and he may opt to refinance the operation, though he did successfully float his Australian budget airline Virgin Blue.

The signs are not good for telecoms flotations. Fixed-line debutants Eircom and Belgacom have hardly soared since listing. And investors have concerns about growth prospects as the mobile phone market matures.

Virgin Mobile's apparent success has rebuilt Branson's reputation for building companies from scratch - but it is still uncertain whether he can convince the City to get on board if he does launch it on the stock market.