There's a new girl in town, and she came a little bit cheaper than some expected.
Virtual wireless operator Virgin Mobile USA (NYSE:VM) made its public debut yesterday by pricing its stock at $15 per share, on the low side of the expected $15 to $17 range. The company sold about 25.5 million shares and by the end of its first trading day, the stock had risen 5% to $15.75 a share.
Virgin Group and partner Sprint Nextel (NYSE:S) originally planned a $100 million offering of the company in May, but then upped the public share sale substantially to a potential $500 million draw in an amended filing in July. In the end, Virgin Group netted about $413 million, and its stake dropped to 35.7% of the company. Sprint Nextel's share of the entity declined to 17.2% after it sold shares as well.
The timing of the IPO could have been better -- several recent flameouts in the mobile virtual network operator world have given investors a bitter taste for the sector. Private operator Amp'd Mobile declared bankruptcy in June and more recently, Disney (NYSE:DIS) shuttered the doors on its Disney Mobile effort.
Sprint Nextel apparently didn't want to be left holding the bag the way Verizon (NYSE:VZ), Motorola (NYSE:MOT), and Best Buy (NYSE:BBY) did when Amp'd succumbed to debt and declared bankruptcy. The company sold much of its stake for $136 million, reducing its credit risk to Virgin Mobile's indebtedness. Due to a credit facility default in 2005, Virgin Mobile failed to pay Sprint according to its service agreement, and the two companies had to negotiate a new payment schedule that allowed Virgin Mobile more time to pay.
Virgin Mobile commands a strong brand that served 4.8 million customers as of June of this year. But the average revenue per user (ARPU) has dropped in recent years to $21.68 per month in the first six months of 2007. Churn has also been increasing steadily, coming in at 4.8% per month in the first half of 2007.
While a high churn level is not uncommon for a pay-as-you-go operator -- America Movil's (NYSE:AMX) Tracfone sports a 4.7% monthly churn level -- Virgin's churn is increasing while Tracfone's is dropping. Until some positive momentum is seen, investors are better off taking a wait-and-see approach with Virgin Mobile.
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Fool contributor Dave Mock has onesies and twosies knocked, but gets nervous and shaky past threesies. He owns shares of Motorola. Dave is the author of The Qualcomm Equation. Disney and Best Buy are Stock Advisor recommendations. Best Buy is also an Inside Value recommendation. The Fool disclosure policy knows better than to play with matches and hairspray.
