-- Chanticleer
Virgin lucky to have Bain on board
Aug 26, 2020 – 12.00am
Virgin Australia is about a week away from moving into the hands of its new owner, Bain Capital. Employees and creditors are lucky the firm has made its $3.5 billion commitment.
The numbers contained in the Virgin Australia report to creditors give very little indication of how
Bain Capital has positioned itself to make money out of
buying Australia's second major airline. Analysis of how much Bain can cream out of the business requires an understanding of the amount of equity tipped in, the level of debt and some forecasts of earnings.
In a typical private equity transaction, the business will be rebooted on a lower cost base and then readied for sale to the market in about three years. This particular deal might involve a five-year turnaround simply because of the uncertainty caused by the coronavirus and its impact on aviation.
But it is safe to say that one of the world's largest and smartest PE groups is not buying Virgin to earn goodwill among the aviation unions or get brownie points from a federal government desperate to have competition in domestic aviation.
The report is short on detail as to how much costs will be cut by Bain as a result of renegotiating about nine enterprise bargaining agreements. Another missing piece is the amount of aircraft leasing debt that will be taken on by Bain as part of operating a fleet of about 70 Boeing 737s.
There are several references to $1 billion in earnings before interest, tax, depreciation and amortisation before aircraft rent in fiscal 2022 and 2023. But these are contingent numbers that require Bain to make further payments to creditors and not forecasts.
Bain is playing its cards close to its chest and so is
Vaughan Strawbridge, Virgin's joint voluntary administrator and Deloitte partner, who has released a holistic number with little transparency attached to it.
Strawbridge says the "total commitment from Bain Capital is valued around $3.5 billion, which includes all employee entitlements paid in full, all customer travel credits honoured in full, assumption of a significant portion of secured debts and aircraft lease liabilities, and a return to unsecured creditors".
From Strawbridge's point of view the most important aspects of the report to creditors are that it confirms Bain will cover about $400 million in employee entitlements in full, the continuation of more than $1 billion supply and finance arrangements, about $600 million in customer credit for flights taken forward, and a distribution to unsecured creditors of an estimated $462 million to $612 million.
Close observers of the Virgin sale process reckon the creditors are getting a great deal from Bain and the airline's unions are in a commanding position because Bain is on the hook for new enterprise bargaining agreements.
Chanticleer's conclusion after reading the 192-page report is that Virgin's employees and its creditors are lucky to have a company of Bain's financial strength on board. Unlike the bond holders who have played
a guerilla warfare game for the past two months, Bain actually
stumped up $125 million in cash to keep the airline afloat.
While it is true its mix of debt and equity is a mystery, the creditors' report shows it is buying a company that has not been well run over the past decade. Virgin's previous management cop a pasting for their poor strategic decision to begin a capacity war with Qantas.
If creditors and unions needed to be reminded of how fortunate they are to have Bain in the box seat to buy Virgin, they only needed to read the Qantas announcement yesterday in which it will
slash 2500 ground staff in order to save $100 million in annual costs and slash capital expenditure by $100 million over the next few years.
Strawbridge says it is in the interests of creditors to approve a deed of company arrangement at the creditors' meeting on September 4.
"Where we are today is a testimony to the commitment of the staff and all stakeholders of the business who have made this possible and so strongly supported the administration process," he says.