Originally Posted by
PoppaJo
What is most disturbing is the comment that the process is on ‘Virgin Management’s’ agenda’. They need to rid themselves of this Management and start again. It seems Virgin’s Management team will be selecting the winning bidder. Won’t be Bain then, as Carla would wipe them all out.
It's a decidedly odd administration, that's for sure. A bit like having Captain Schettino managing the Costa Concordia's salvage operation.
It seems that high on the list of assessment criteria for the sale is 'Buys into
Virgin v2.0 (Full service domestic + international +LCC Qantas Mini-Me) business model (aka the Scurrah-Strawbridge Delusion). And you get the sense that 'Retains current management team' is also towards the top of the criteria along with 'Minimises job losses'. Pesky stuff like the financials hasn't been getting much in the way of airplay.
In terms of the financials you can run the numbers on the back of napkin to get a feel for what this deal has to looks like.
Any prospective new owner buying into 'the Delusion' is going to have to be able to take on about $3 billion in debt and liabilities. That will be comprised of $1.5 billion of the currently $2.3 billion in secured debt plus around $1 billion in leases (roughly half of the current $1.9 billion). The other half billion is the employee entitlements that will simply be rolled over as a liability.
Then there's what needs to be stumped up in cash. If you're going to continue trading with the current landlords and supplier base, you are not going to be able to stiff them on what was owing when the business went into administration. That's $235 million. The unsecured bond holders aren't going to take much less than 20 cents on the dollar, so that's another $400 million. So, that's the best part of $650 million just to open the doors again.
You then have the vexed matter of recapitalising the business. That will be about $1 billion in cash or cash equivalents plus sufficient float to cover a very likely first year loss. If the new owner decides to honour the travel credits issued the loss could easily run to $500 million; if they don't they might squeeze by with a loss in the double-digit millions, it just depends on how much they bleed market share by not honouring the credit vouchers.
So the deal looks like $5 billion in cash and debt and that's before you even think about buying out the current equity. One dollar sounds like the right price but I suspect it could go up to around the $100 million mark.
Call the deal $5 billion and change.
It is probably instructive that the crowd with half a trillion under management, Brookfield, walked away on Monday. They were being advised by Virgin's former Chief Financial Officer. I wonder if they know something the rest of us don't.
Any old how, from a financial perspective, Bain could probably manage the $5.x billion. A deal like this would double Cyrus's assets under management so, short of finding a deep-pocketed partner, they'd have to struggle to make the cut I would think. It would also be a stretch for Indigo. BGH would also struggle to come up with $5 billion unless it lent heavily on AustralianSuper (and I'm trying to picture what that investment case would look like - it would have to be heavily weighted towards making a return on a subsequent public float).
Back on the philosophy criteria, BGH is the only proponent likely to buy into 'the Delusion' and look to retain Scurrah and Co. Cyrus and Indigo would not go near that business model. Bain might but I doubt it, and in any event Bain would be handing Schettino and the bridge crew their hats just as quickly as the could replace them.
I think that this thing will quickly come down to whether BGH can fund the transaction. That in turn comes down to whether AustralianSuper will stump up the required coin. And it's likely that Bain, Cyrus and Indigo will pretty quickly join the dots on how important embracing 'the Delusion' is to a successful outcome (probably the day that they meet with management and the unions) and realise that their money is better spent elsewhere.
And now, there's the added complication of whether the administrator has enough cash to run the sale process while remaining solvent. Like all good circuses there's plenty to see ... and no shortage of clowns.