Virgin Mobile shrugs off flotation fears

Virgin Mobile insisted yesterday that it would not be cutting the price range for its float next week, despite investors' concerns with the offer.

Virgin Mobile insisted yesterday that it would not be cutting the price range for its float next week, despite investors' concerns with the offer.

A spokesman for the mobile phone operator said: "The roadshow is proceeding well. There's a lot of interest and there are no plans to alter the price range."

The mood in Virgin Mobile was lifted yesterday by rumours of some sizeable orders from UK institutions even though there is still some uncertainty as to what the next couple of days will bring. The plan is to price the shares on Tuesday evening and begin trading on Wednesday.

The company is being brought to the market by JP Morgan and Morgan Stanley with a price range of 235p-285p. Independent analysts expect the offer to be priced at the bottom of the range. In a note entitled "Nearly Virgin on fair value", Rodney Sherrington, analyst at ABN Amro, said: "Virgin Mobile has had great success to date as a niche player, but competition in the UK is set to significantly increase, impacting future growth and margins. We value Virgin Mobile's equity at £594m, or 238p per share, before a minority float discount."

Richard Branson is planning to float 40 per cent of the company and the discount the market attaches to shares as a result could be as much as 10 per cent.

At the top end of the pricing range, Virgin Mobile would be valued at a premium to Vodafone. Potential investors feel this is too high, and are worried about the rising number of mobile operators in the UK seeking market shares. As well as the main network operators, new entrants have include 3 as well as high street names including Tesco.

Companies such as Virgin have come in to the market as so-called virtual mobile network operators. Their calls are carried over the mobile networks of the main operators. Barriers to entry are relatively low for new entrants with a strong brand name and marketing skills.

"We believe the UK market is about to see a significant increase in competition, driven by the launch of 3G services, increasing focus on subscriber retention and the introduction of simple, bundled tariffs. This will negatively affect Virgin Mobile the most because it has 100 per cent of its value in the UK versus only 50 per cent for mmO ₂," Mr Sherrington said.

Stefan Herz, analyst at Bryan, Garnier & Co, said: "Our preliminary assessment of Virgin Mobile, following the release of the prospectus and last week's meeting with analysts, is the issue looks reasonable at the bottom of the indicated price range but the top of the price range leaves little room for the share price performance post-IPO."