Sir Richard keeps 'em guessing

Sir Richard keeps 'em guessing - 22nd May 2003
(Credit: The Sydney Morning Herald)

Elvis, now at Virgin Casino

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.


Richard Branson


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The Virgin Files

Branson to reduce stake in listed Virgin - 8th December 2003


Richard Branson