Originally Posted by
ozbiggles
I don’t know but I think JB might have sold PS a lemon with Velocity. I think JB sold it for half what PS paid to get it back but it may have been a case of the then owners of Velocity said to PS if you don’t buy it back for this price we will dump it and there goes your loyalty scheme and we all know how much airline CEOs love their loyalty schemes. No doubt the staff were told how good an idea it was to sell it...and how good it was to buy it back at twice the price!
My understanding is that the grand plan for Velocity was to spin it off in a public float. That is the only play that makes any financial sense given the way the deal was structured.
There's no way that anyone could justify paying $700 million in 2019 for the 35 percent stake that was sold for $335 million in 2014 just based on its contribution to the business. If you look at Velocity's revenue and EBIT contributions over the years neither more than doubled over those five years (unfortunately they didn't start breaking Velocity out as a sector in its own right till 2015 so there's a bit of a fudge factor in there).
Just back of the napkin, that $700 million re-acquisition deal would have been NPV negative to the tune of about $200 million in 2024 when the bonds matured. And that's using 10 percent annual EBIT growth and a corresponding rate of growth in the book value of the business. That deal shouldn't have gotten past a year one business analyst let alone a CFO and a Board unless there was another play involved.
To that end, the float might have made financial sense but you've got to be very, very concerned when an airline's big play is the IPO of an affiliated non-airline business. It's a spiv's play; definitely not core airline business.
More, or at least equally, to the point, it was at best a medium term play - something that they might have looked to run in 2022/23. The pesky thing about the medium term is that you have to traverse the short term to get there. And that one deal, with the associated $900 million bonds issue at 8 percent, wrecked the business's short term position by driving their net equity into the red. It didn't just leave them vulnerable to a 'black swan event' (and I'd argue that the coronavirus isn't strictly a black swan event, but that's a discussion for another day), a gnat's fart worth of headwind was going to cause them worries given the business's abject inability to manage its cost base.