Wirraway
28th Jan 2005, 16:00
Sat "Melbourne Age"
No more pilot errors
By Alan Kohler
January 29, 2005
There was never much doubt that Chris Corrigan would move to own more than 50 per cent of Virgin Blue, especially if CEO Brett Godfrey stuffed up, which he did - twice.
Whether Corrigan warned Godfrey not to increase capacity too aggressively last year, and to hedge against a rising oil price, and can now say, "I told you so", we may never know, but Virgin Blue did put on more capacity than market growth warranted, hammering its yield, and it did get caught by the rising oil price. Not happy, Brett.
So Corrigan is moving to "clarify" control. With more than 50 per cent there will be no doubt about who is captain, who is co-pilot (Branson) and who is cabin purser. Indeed, purser Brett Godfrey may find himself strapping on a parachute.
Patrick Corporation, 45.4 per cent owner of Virgin Blue, now has three board seats out of eight. The company's constitution provides for a maximum of 10 directors. With more than 50 per cent, Patrick will be able to appoint two extra directors and replace one of the two independents, thereby getting total control of the board.
Will anything change, beyond the odd senior executive execution? Probably not, and perhaps not even management. But Chris Corrigan is a man who likes clarity; and six out of 10 directors and 51 per cent of the capital provides it.
So why make a full takeover offer if just 51 per cent is the aim? After all, it's hard to imagine there is much prospect of Sir Richard Branson disgorging his 25 per cent of Virgin Blue into the offer for $1.90 a share; if that were the intention of the bid, Corrigan would, you would think, have spoken to his co-pilot and politely made him an offer.
In fact, it's probably just Corrigan being tight, as usual.
The consensus among brokers yesterday was that creeping to 50 per cent over 12 months at 3 per cent every six months, as provided by the Corporations Law, would have cost more like $2.20 a share. On the 60 million or so shares required, that's about $20 million more than they will cost in yesterday's bid.
And making a formal bid is cheaper than paying brokerage. There is no investment bank involved (no success fee) and all the work is being done in-house, apart from a small amount of legal and share registry stuff; $250,000 will probably cover it.
Buying the stock on-market would cost about twice that in brokerage, although Ebenezer Corrigan has a habit of refusing to pay brokerage, barking at the hapless, cringing dealers to get a fee from the other side instead.
The fact that Virgin Blue's share price has promptly jumped above the bid price does not mean Patrick will have to pay more than $1.90 to succeed. As David Tweed has shown, someone always accepts, and in Corrigan's case another 4.7 per cent will do the trick. Ten or 20 per cent would be even better (even more clarity).
Which prompts the question: will Virgin Blue ever be a decent business and ever do anything other than drag Patrick Corp's share price lower, as it does now?
Institutional investors love Patrick's stevedoring business, like its rail business and hate its airline business. Which is ironic when you consider they are all either duopolies or monopolies. The difference is that in stevedoring Patrick owns the infrastructure; in the airline business, the owners of the infrastructure (airports) are trying to lower the barriers to entry to encourage competition.
The problem is that airline managers love buying planes. They are bees to Boeing's and Airbus's honey, and get stuck buying too many of them; monopoly rents are elusive. Over-capacity is the endless enemy of airline shareholders who don't directly control their management (which is what Chris Corrigan wants to remedy).
There is talk around the market that European discount airline Ryanair was sniffing around Virgin Blue last year with a view to making a bid, but this is unconfirmed. And there is little doubt Singapore Airlines would have a serious look at the company if it came on the market.
Chris Corrigan's shareholders would love him to sell Virgin Blue once he gets full control but, as Trevor O'Hoy at Foster's has shown, managers don't always do what their owners want (O'Hoy had even promised not to bid for Southcorp).
More likely Corrigan will back himself to improve Virgin Blue's performance once ownership "clarity" has been achieved. If he can't - it will be "hello Ryanair and Singapore Airlines".
Speaking of Foster's and its bid for Southcorp, Patrick says it is bidding 15 times 2005 net profit for Virgin Blue, after interest, tax and depreciation. As my column on Wednesday pointed out, Foster's also says its bid is 15 times 2005 profit, before interest, tax and depreciation.
Same multiple, but twice the price. Foster's wine bid is exactly twice as expensive as Patrick's airline bid because Southcorp's net profit is half its EBITDA.
Is the wine business that much better than airlines? No - it is just that wine managers love vineyards as much as airline managers love planes.
Alan Kohler also presents finance on the ABC TV News.
[email protected]
=========================================
No more pilot errors
By Alan Kohler
January 29, 2005
There was never much doubt that Chris Corrigan would move to own more than 50 per cent of Virgin Blue, especially if CEO Brett Godfrey stuffed up, which he did - twice.
Whether Corrigan warned Godfrey not to increase capacity too aggressively last year, and to hedge against a rising oil price, and can now say, "I told you so", we may never know, but Virgin Blue did put on more capacity than market growth warranted, hammering its yield, and it did get caught by the rising oil price. Not happy, Brett.
So Corrigan is moving to "clarify" control. With more than 50 per cent there will be no doubt about who is captain, who is co-pilot (Branson) and who is cabin purser. Indeed, purser Brett Godfrey may find himself strapping on a parachute.
Patrick Corporation, 45.4 per cent owner of Virgin Blue, now has three board seats out of eight. The company's constitution provides for a maximum of 10 directors. With more than 50 per cent, Patrick will be able to appoint two extra directors and replace one of the two independents, thereby getting total control of the board.
Will anything change, beyond the odd senior executive execution? Probably not, and perhaps not even management. But Chris Corrigan is a man who likes clarity; and six out of 10 directors and 51 per cent of the capital provides it.
So why make a full takeover offer if just 51 per cent is the aim? After all, it's hard to imagine there is much prospect of Sir Richard Branson disgorging his 25 per cent of Virgin Blue into the offer for $1.90 a share; if that were the intention of the bid, Corrigan would, you would think, have spoken to his co-pilot and politely made him an offer.
In fact, it's probably just Corrigan being tight, as usual.
The consensus among brokers yesterday was that creeping to 50 per cent over 12 months at 3 per cent every six months, as provided by the Corporations Law, would have cost more like $2.20 a share. On the 60 million or so shares required, that's about $20 million more than they will cost in yesterday's bid.
And making a formal bid is cheaper than paying brokerage. There is no investment bank involved (no success fee) and all the work is being done in-house, apart from a small amount of legal and share registry stuff; $250,000 will probably cover it.
Buying the stock on-market would cost about twice that in brokerage, although Ebenezer Corrigan has a habit of refusing to pay brokerage, barking at the hapless, cringing dealers to get a fee from the other side instead.
The fact that Virgin Blue's share price has promptly jumped above the bid price does not mean Patrick will have to pay more than $1.90 to succeed. As David Tweed has shown, someone always accepts, and in Corrigan's case another 4.7 per cent will do the trick. Ten or 20 per cent would be even better (even more clarity).
Which prompts the question: will Virgin Blue ever be a decent business and ever do anything other than drag Patrick Corp's share price lower, as it does now?
Institutional investors love Patrick's stevedoring business, like its rail business and hate its airline business. Which is ironic when you consider they are all either duopolies or monopolies. The difference is that in stevedoring Patrick owns the infrastructure; in the airline business, the owners of the infrastructure (airports) are trying to lower the barriers to entry to encourage competition.
The problem is that airline managers love buying planes. They are bees to Boeing's and Airbus's honey, and get stuck buying too many of them; monopoly rents are elusive. Over-capacity is the endless enemy of airline shareholders who don't directly control their management (which is what Chris Corrigan wants to remedy).
There is talk around the market that European discount airline Ryanair was sniffing around Virgin Blue last year with a view to making a bid, but this is unconfirmed. And there is little doubt Singapore Airlines would have a serious look at the company if it came on the market.
Chris Corrigan's shareholders would love him to sell Virgin Blue once he gets full control but, as Trevor O'Hoy at Foster's has shown, managers don't always do what their owners want (O'Hoy had even promised not to bid for Southcorp).
More likely Corrigan will back himself to improve Virgin Blue's performance once ownership "clarity" has been achieved. If he can't - it will be "hello Ryanair and Singapore Airlines".
Speaking of Foster's and its bid for Southcorp, Patrick says it is bidding 15 times 2005 net profit for Virgin Blue, after interest, tax and depreciation. As my column on Wednesday pointed out, Foster's also says its bid is 15 times 2005 profit, before interest, tax and depreciation.
Same multiple, but twice the price. Foster's wine bid is exactly twice as expensive as Patrick's airline bid because Southcorp's net profit is half its EBITDA.
Is the wine business that much better than airlines? No - it is just that wine managers love vineyards as much as airline managers love planes.
Alan Kohler also presents finance on the ABC TV News.
[email protected]
=========================================