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Wirraway
4th Feb 2003, 13:06
Wed "Sydney Morning Herald" 5/2/03

Patrick could cut stake in airline
By Brian Robins
February 5 2003

A reluctant Patrick Corp may be forced to sell part of its half share of discount airline operator Virgin Blue in any public float.

Virgin Blue is a 50:50 joint venture between Patrick Corp and Sir Richard Branson's Virgin group of companies.

Managing director Chris Corrigan yesterday told shareholders at the company's annual meeting that Patrick Corp remained "indifferent" to plans by the Virgin group to sell down its stake in Virgin Blue.

But he said the group would keep a commitment to sell as much as 5 per cent of its shareholding if necessary, "otherwise we will keep our 50 per cent".

Any move to take Virgin Blue public will likely be made in the coming few months, when audited accounts for the year to March are available.

Shareholders approved issuing 1 million free options to Mr Corrigan with an exercise price of $14. While the vote was approved on a show of hands, there was significant opposition to the new issue with 44 million proxy votes opposed and 66 million proxies held in favour.

Speaking after the meeting, Mr Corrigan said the options formed an important part of his remuneration package. In the latest financial year he was paid a base salary of about $650,000.

In the year to October Virgin Blue contributed earnings before interest, depreciation and amortisation (EBITDA) of $39.8 million on revenue of $205.6 million to Patrick Corp's profit. Patrick brought to account seven months contribution from its stake in Virgin Blue.

Virgin Blue has indicated previously that it expects to post a pre-tax profit of more than $100 million for the year to March, 2004, with revenues expected to top $500 million.

With a 24 per cent share of the domestic market, up from 11 per cent a year ago, Mr Corrigan said Virgin Blue was targeting a 30 per cent share of the aviation market in 12 months' time. Market share growth would be assisted by better terminal access along with increased flight frequency, he said.

Virgin Blue has services on 19 of the top 20 domestic routes and will launch services on the final route - Sydney to Canberra - from April, after it takes delivery of additional aircraft.

"As we build our share with services at the lowest price available, we expect reasonable market share gains," Mr Corrigan said. "We are definitely trying to avoid cutting margins."

Under a formula agreed between the two parties, Patrick Corp is to pay Virgin $30 million for each $100 million of value achieved above $600 million of market value of the listed entity. The size of that payment diminishes over time.

"We expect to pay a top-up and may sell 5 per cent if needed, for liquidity purposes, otherwise we will stay at 50 per cent," Mr Corrigan said.

Regional low-cost airline operators in the US such as Sky West are trading on price-earnings multiples of 10 times net earnings, signalling that Patrick Corp may have to pay a top-up of as much as $100 million for the Virgin Blue stake, depending on the degree of optimism over the earnings outlook for the airline in 2003-04, when further aircraft are to be delivered.

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Wed "The Australian" 5/2/03

Branson float puts Patrick at the controls, ready to take off
February 05, 2003
Mark Westfield

CHRIS Corrigan's decision to hold on to Patrick Corp's half-share of Virgin Blue will pay dividends for the transport and logistics group when Richard Branson floats part of his 50 per cent about mid-year.

Patrick paid $260 million a price thought reasonable at the time, given Virgin Blue's lack of earnings for the 50 per cent early in 2002. When Virgin floats 10, 15 or 20 per cent once the market's had a chance to analyse the airline's full-year result to March 30, investors will value the carrier at something over $1 billion, perhaps as high as $1.5 billion.

This is a nearly threefold increase for Patrick's half-share in less than a year. The downside is Patrick has agreed to an escalator clause, by which it will pay Virgin $30 million for every $100 million above what was thought to be a generous $620 million value.

Assuming Virgin is valued at roughly the same 7.1 times earnings before interest and tax at which Qantas is capitalised, Virgin Blue's full market capitalisation will be about $1.14 billion, based on estimated year 2003 EBIT of $160 million.

Only 15-20 per cent of this will be listed, but a float gives the anchor partners a good basis for valuing their holdings.

The whole equation may change on February 20 when Qantas announces what promises to be a bumper first-half result of about $350 million.

If a Virgin Blue listing values the airline at about $1.2 billion, an escalator payment of about $180 million by Patrick would be swamped by a huge abnormal revaluation in the books of something approaching $350 million.

Corrigan reckons there's still some upside for Patrick and Virgin Blue over the next 12 months, and that's why he has no intention of selling.

As the airline claws to its market share objective of about 30 per cent, it will start to meet resistance from Qantas, but not yet. It has 26 per cent now, and has had a fairly easy run grabbing market share since Ansett started collapsing in September 2001, before falling over completely in February last year.

Virgin's main problem was finding aircraft. This has been a problem for Qantas, too, and the market's been in disarray to some extent as the airlines scrambled for capacity to fill the void left by Ansett, which had 40 per cent before it went into steep decline just before going into administration.

Now the two rivals have close to the numbers of planes they need, the relative shares will tend to stabilise and growth will get harder for Virgin.

Until recently, Qantas was juggling aircraft between its international and domestic services, and let more share slide to Virgin than it might have wanted.

If Virgin proceeds with a partial float and Patrick holds on to its 50 per cent, potential control shifts, too. Patrick emerges as the more powerful partner. Patrick seems to have been at the controls in terms of the big strategic decisions since it bought in, anyway. Corrigan seems happy to let Brett Godfrey and his team run and market the airline day to day.

Once Virgin sells, Corrigan and Patrick can be expected to assume more control.

This will be a good thing for Patrick shareholders, and probably Virgin Blue's as well.

Corrigan will want to move to integrate the airline's cargo-carrying capacity with his rail, road and wharf facilities.

Virgin Blue's Boeing 737s carry about three tonnes of freight already, but the demise of Australia's main freight airline, Ansett, leaves opportunities in this area.

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