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May 03, 2007
Confused by Virgin Mobile USA's S-1
I just finished perusing Virgin Mobile USA's S-1 filing, submitted on May 1. And I feel very confused.
On the plus side, the prepaid cell phone service provider's performance looks pretty good: Last year, Virgin lost $37 million on more than $1.1 billion in sales. That's pretty close to break-even. With 4.88 million customers, the company controls 15% share of the prepaid mobile phone market. But: The company's customer turnover is rising, its average revenues per customers are falling. And Virgin Mobile USA has no cash whatsoever, and half a billion in debt.
A few other things in the filing gave me pause. Apparently, public investors will only be able to buy shares in a holding company -- not the Virgin Mobile USA business itself. The prospectus outlines a very confusing new organizational structure, similar to a real-estate investment trust (basically, the company investors buy shares in owns no business assets). As a results of this organizational structure change, there can be conflicts of interest between public shareholders and holders of the actual operational assets (current owners, Sprint-Nextel and the Virgin Group), according to the filing's risks section.
Worse, as part of the reorganization, the company will amend and restate its agreement with current co-owner and network provider, Sprint-Nextel, running through 2027. The prospectus doesn't say what exactly the amendment will entail. Considering that Sprint is taking a major cut of profits, an amendment can have a lot of impact on Virgin Mobile USA's financial performance. And one of the risk sections explains that, in July 2008, Sprint's affiliates have a right to stop offering Virgin's service in their regions if, for example, Sprint Nextel changes hands (and we've all heard talk of Sprint being for sale). Would you be worried about these? Are you considering investing into the IPO?
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While Virgin has an amazing consumer brand and awareness, it is remarkable to me that a company of this scale can be built as a 'virtual company'. that is, they own no network of their own. rather, they entirely ride on a competitors network. doesnt this scream vulnerability....notwithstanding a iconic brand?
Posted by: jason galanis at May 4, 2007 02:05 AM
Last I looked, Apple didn't manufacture iPods, nor do they record any of the music or TV shows in the iTunes store. It's all about marketing baby! And these guys are great at it. Just walk around Best Buy. The Virgin Mobile display is the most impressive place in the store. Even the big carriers look pale in comparison.
Posted by: Neil Brillhart at May 6, 2007 02:08 AM