IPO Time for Virgin Mobile USA?

The market for tech offerings is stronger and other youth-oriented carriers are cutting into Virgin's lead, so there might not be a better opportunity

by Olga Kharif

Is the clock ticking on a Virgin Mobile USA public offering?

Talk that Virgin Mobile USA would go public has swirled almost since the company debuted in 2002 as the first prepaid wireless service for young people. A joint venture between Richard Branson's Virgin Group and Sprint Nextel, the business has 4.6 million subscribers and became profitable on an operating basis last year.

But now other mobile phone upstarts are chipping away at Virgin's popularity with young subscribers, offering inexpensive service plans, innovative features, and cool phones. Their initial success is fueling speculation that Virgin Mobile USA must file for an initial public offering (IPO) soon—or it might not be able to go public at all, trampled by the other youth brands.

The timing might be good for Virgin Mobile owners to take it public. After a bit of a subscriber slowdown in 2006, its growth is accelerating again. (The company adds about 1 million users per year.) Besides, Sprint Nextel (S) could use the extra cash to fund an anticipated $8.5 billion in capital expenditures this year.

Stronger Market

Virgin Mobile USA declined to comment on its IPO plans. "As we've grown, [our parents] are looking at what the various alternatives are," says Dan Schulman, CEO of Virgin Mobile USA. "They always look at what might be the best path for us."

Analysts don't rule out the possibility of Virgin Mobile USA being rolled into Sprint or sold to another carrier, but most believe the IPO route makes more sense. The tech IPO market is stronger than it has been in years, and so is the stock market. In addition, investors have few pure-play wireless service providers to choose from. Shares of one player, Leap (LEAP), have risen by more than 70% in the past year. Clearwire, a next-generation wireless company, has recently refiled to go public (see BusinessWeek.com, 12/20/06, "WiMAX IPOs Are on the Way").

Just how much might Virgin Mobile USA be worth? One point of reference is Leap, which, with about 2 million subscribers, has a market cap of $4.31 billion. How many shares might be offered is uncertain, but Virgin Mobile U.K., another of Branson's wireless ventures that was started three years earlier than its U.S. cousin, floated 25% of its business on the London Stock Exchange in 2004, raising $243 million. At the time, the British outfit, acquired by NTL for $1.6 billion last year, also boasted a little over 4 million customers.

Back to Basics

If Virgin Mobile USA does go public, investors aren't likely to look at it with the same starry eyes they might have a year ago. For starters, the company's focus has changed. While it began by targeting 18- to 24-year-olds, it currently goes after a broader, 18- to 34-year-old demographic. Appealing to teens and people in their 30s may prove to be a difficult balancing act. By trying to be everything to everyone, Virgin risks losing its once razor-sharp focus.

The company isn't as interested as it once was in developing the next hot application. Virgin Mobile had a reputation for offering the latest applications and services like the rescue ring (a preprogrammed phone ring that functions as an excuse to escape a bad date). But that's changing. Virgin Mobile USA is paying more attention to offering inexpensive short-text messaging (SMS) and early availability of night minutes. "The more advanced applications, they cost a lot of money," says Schulman. "And most of the youth market doesn't have that kind of money. We're going to focus on the basics."

Clearly, many of Virgin's competitors disagree. Larger wireless carriers are increasingly going after the youth market with new, innovative offerings. Last November, Verizon Wireless launched special mobile content for Latino youth. This summer, Cingular/AT&T (T) will start offering Apple's (AAPL) iPhone (see BusinessWeek.com, 1/12/07, "The Real Genius of Apple's iPhone").