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Sir
Richard keeps 'em guessing - 22nd May 2003
(Credit:
The Sydney Morning Herald)
When Sir Richard Branson visited
Australia last week he didn't attempt to sell
his story to the business press. Instead, he went
to the masses via chat shows like Network Ten's
The Panel.
He
is a master at selling himself and his brand,
Virgin.
The
Panel slot was fabulous public relations as gushing
panel members marvelled at his business acumen.
This
is just the sort of image building that allows
Branson to sell whatever product he is pushing
to the less sophisticated end of the public market.
But
if he loses the arbitration case he is in with
Chris Corrigan's Patrick Corp, the ability to
convince mum and dad investors that his Australian
airline, Virgin Blue, is an opportunity to make
money will be put to the test.
Right
now Branson wants to float the airline and raise
20 per cent of new equity. His plan is to sell
down from 50 per cent to 45 per cent and Patrick,
his partner in the airline, will do the same.
The
trouble is Patrick contends it has a shareholder's
agreement with Branson that secures Patrick's
right to retain 45 per cent and not be diluted.
The
two are now in arbitration to test the validity
or the meaning of this agreement.
In
the broadest terms, Corrigan is a buyer of the
half of Virgin Blue that he does not own and Branson
is a seller.
The
extent to which Bransonis a forced seller is one
of the great unknowns of the interntational business
community.
There
is a lot of smart money out there that is convinced
he is financially stretched which, if correct,
suggests he would be a very willing seller of
his part of Virgin.
(For
this reason a float provides a far easier sale
process than a trade sale.)
It
should also be said that even Corrigan's camp
is not sure about his financial position.
Patrick
would be happy to buy out Branson and take over
management of the airline, a business Corrigan
reckons he understands.
But
it all hinges on whether Branson can force a float.
If
he can't, it will be extremely difficult for Branson
to take Virgin Blue to the market.
He
can certainly sell a larger part of his stake
to investors and while this will allow a larger
free float it will not provide a fresh equity
injection into the airline.
Talk
to any Australian fund manager that reports to
a trustee and they will tell you a business with
a debt to equity gearing ratio of nine to one,
particularly in the volatile airline industry,
is a business in which they would not invest.
Virgin
has a nice earnings story to tell, having just
reported a $158 million pre-tax profit and boasting
a nice new fleet of aeroplanes and a low cost
base.
But
the fact remains that it would be a difficult
proposition to sell to the professional market
unless it could raise some cash.
There
would be some of the less risk averse international
funds lining up. But given the bath they have
taken in the international airline industry, the
queue would be short.
The
bottom line is Branson would have to sell down
his stake in a difficult market.
If
he wins the arbitration and can force Patrick
to dilute its position below 45 per cent then
he can reduce debt levels and present investors
with a better proposition.
At
this stage, Virgin Blue is funded as more of a
venture capital proposition.
But
a lot can change in the airline game overnight,
as recent events have shown.
Virgin
Blue has carved itself a very cosy niche as a
duopoly player with a little under 30 per cent
of the domestic market. It also has a competitor
that can't afford to begin a pricing war to claw
back market share.
As
the lower cost operator, it can look forward to
reasonable cash flows as long as Qantas is happy
not to make a fuss.
And
if Singapore Airlines - whose expansionary wings
have been clipped thanks to SARS - decides eventually
to enter our market, look out.
Profiles
Richard
Branson
Virgin
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Branson
to reduce stake in listed Virgin - 8th December
2003
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