MICHAEL WEST. The Virgin Brides: fate of airline on a knife-edge as bids lob and cash runs dry (MWM 19.5.20)May 28, 2020
With every day that passes, the risk to 10,000 Virgin employees, and Australian travellers and taxpayers rises. The risk of liquidation of Virgin Australia that is, the risk that the Federal Government will have to stump up anyway, whether Virgin is rescued or not, the risk the airline will end up in the clutches of a leveraged buy-out merchant chasing the lucrative “Golden Triangle” licence to operate Melbourne/Sydney/Brisbane routes while axing regionals.
If press reports are correct and Virgin has $100 million left in cash, insolvency is just weeks away, perhaps a month. But the buyers, private equity tyre-kickers all, have time on their side.
All four are investors who deploy other people’s money to swoop on distressed assets, strip out the cash via asset sales, stick debt in its place, take the long-handle to staff and other costs and flip the acquisition to share market investors later.
They – Bain Capital, BGH Capital, Indigo Partners and Cyrus Capital Partners – don’t need this deal; there’s a hundred distressed airlines up for grabs, all over the world, and a million other bargain-basement assets on which to prey. They are there to cherry-pick the best assets and wedge a gullible government for subsidies.
The fate of Virgin therefore rests on a knife edge. If a firm bid does emerge from the present crop of four “non-binding indicative offers”, and if the major creditors agree to take a massive haircut and accept the offer, then the bidders will have their begging bowl out for government money anyway.
In the case of Ansett, whose sad demise in 2001 is superbly instructive, the billionaire bidders Lindsay Fox and Solomon Lew were paraded as the airline’s saviours. The deal was almost done. There were happy snaps in Ansett cockpits before they hit the government up for money, which was refused, and the rest is history. Taxpayers picked up the bill for thousands of Ansett staff. A Qantas monopoly emerged.
In this case, there is a global pandemic, there is no visibility as to when aviation markets will open again, when tourist numbers will ramp up to pre-Covid levels, or business travel replace teleconferencing.
So the potential buyers won’t be offering much, maybe just a few cents in the dollar to secured creditors, the banking syndicate and the bondholders owed $6.8 billion.
If they don’t like it, creditors will move to appoint a receiver, put their own person into the Virgin fray to protect their position, or turn Deloitte into a liquidator and begin the costly wind-up.
By the time Deloitte and the Virgin bankers and bondholders are finished with it, and the milling fee-takers have supped long and hard on the carcass, the Government will pick up the costs, the cost of leaving a monopoly to Qantas.
Time is absolutely of the essence. When we began writing yesterday evening, there was one Virgin aircraft in the sky on the East Coast of Australia, and a handful of Virgin Fokkers doing FIFI jobs in the West. The vast logistics of running an airline cost millions of dollars a week, even when the planes are grounded, the maintenance costs are immense.
So the bankers face a critical time dilemma too. Were it not for the cost of maintaining a grounded fleet they would prefer to wind up the business and slowly sell the assets to maximise prices, as Korda Mentha did with Ansett, reaping more than $100 million in fees over 15 years. So the key negotiation in this process rests with the bidders and the secured creditors. It is about the size of the haircut.
Sir Richard Branson is there foo for his pound of flesh. Do they keep the brand? A rebranding alone and cutting ties with Branson would cost hundreds of millions. Then there is the Queensland Government and its $200 million pitch. We don’t know what they want for their $200 million. It was originally tied to another bid which has lapsed, to the vultures from Brookfield and Macquarie.
There is no reason why they can’t attach to another bidder. They are there to protect jobs in Queensland, and regional routes and could put in some capital and perhaps loan guarantees for a 49% stake.
Yet the cleanest option remains compulsory acquisition under Section 51 of the Constitution where the Federal Government has the airline independently valued, pays a “just price” and buys the assets – the planes and the people that is, not the company.
Buying into a company which owes $7 billion would pit government against hordes of vested interests each with their own agendas and lay open the likelihood of messy and protracted court actions.
It is not too late to pursue this course of action, compulsory acquisition. And although an ideologically odious option for a Government committed – in rhetoric only – to free market outcomes, it would simply be another government intervention. The regional rescue package concocted by Deputy Prime Minister Michael McCormack is already costing taxpayers roughly $1,200 per seat per flight.
Whichever way Virgin goes, sale or liquidation, the Government will pay. The question is how much?