View Full Version : Virgin Blue Over Float

1st Apr 2003, 07:44
Virgin partners in float dispute
Apr 1 AFR
Jane Boyle

Bumpy ride...Chris Corrigan and Richard Branson are blueing over the airline's proposed float. Photo: ROBERT ROUGH
Patrick Corp and Richard Branson's Virgin Group are in dispute over their ownership of Virgin Blue, raising fresh doubts about the timing of the discount airline's $1.5 billion float.

Patrick's chief executive, Chris Corrigan, has refused a request by Sir Richard to begin preparations for a float, opposing calls to substantially lower his shareholding in the airline as a precursor to a sharemarket listing.

The split over the structure of the float revolves around Mr Corrigan's claim that he never agreed to a listing that would involve Patrick reducing its 50 per cent shareholding by more than 5 per cent.

Virgin Group has proposed a float structure that would include an issue of new equity in Virgin Blue to raise as much as $300 million, a move opposed by Patrick.

Virgin had been preparing for an IPO around the middle of the year.

But analysts and fund managers said the Iraq war and sharemarket turmoil could deter investors.

Qantas shares have fallen 10 per cent since Friday, when it was forced to downgrade full-year profit targets by 15 per cent because of a downturn in traffic due to the Iraq war and the outbreak of severe acute respiratory syndrome in Asia.

The war and soft global economic conditions have taken a bigger toll on major US and European airlines, some of which are struggling to avoid bankruptcy.

One airline analyst said Virgin Blue had built itself a strong and profitable niche in the Australian market and held appeal for investors if a float was priced correctly.

"I think there's an appetite for Virgin Blue as a listed company, but only at the right price," he said.

Some fund managers have suggested valuations around $1 billion and the analyst said it could fetch values in the low $1 billion range.

But at valuations of $1.5 billion and above, the analyst said, "the rest of the market's getting altitude sickness at that level, they're getting nosebleeds".

Tensions between Patrick and Virgin Group came to a head about a fortnight ago when Virgin Group served notice on Patrick that it wanted to begin preparations for a float.

Under a shareholders' agreement struck when Patrick bought half the low-cost airline for $260 million a year ago, Virgin Group has the right to call a float at any time and the shareholders agreed to sell down 5 per cent each.

The notice from Virgin Group calls for an initial public offer involving a selldown by the major shareholders of 5 per cent each and a primary issue of new shares, understood to be worth 20 per cent of the airline, to create a capital structure comparable with other low-cost carriers around the world.

However, people involved in the float preparations say Patrick is contesting the validity of the float notice, arguing that it has not agreed to an issue of new equity.

"There's a technical dispute going on over the meaning of the shareholders' agreement, and that is still under discussion," one person familiar with the spat said.

"The dispute is over the claim [by Virgin Group] that they want to have an issue of new equity."

If Virgin Blue were to fetch a targeted valuation of $1.5 billion in a float, a 20 per cent issue of new equity would raise $300 million to strengthen its balance sheet or fund expansion.

However, it would also dilute the stakes of Patrick and Virgin Group by more than 5 per cent.

Patrick Corporation chief executive Chris Corrigan has stated repeatedly that he would not be diluted by more than 5 per cent and was not interested in selling any shares, but that he would abide by the shareholders' agreement.

Virgin Group wanted to issue new shares to ensure there was enough liquidity to attract investors, people involved said.

Patrick is up for a deferred payment on its stake in Virgin Blue in the event of a float. It must pay about $30 million for every $100 million increase in the implied capitalisation of the airline above $600 million. However, the amount payable under this "escalator" clause begins to decline after 20 months.

Virgin Group, which was launched 2 years ago, has grown dramatically since Ansett's collapse last year and has targeted a pre-tax profit of $100 million for the year ended yesterday.

To date it has acquired aircraft on operating leases. An analyst said that structure was attractive to shareholders while the airline was growing. "As it matures, it needs to be stabilised with a stronger balance sheet."

New equity could be kept in reserve in case of a downturn in travel or a price war.

People involved in the float plans also suggested Patrick could pump more cash into Virgin Blue to maintain or increase its shareholding.

A Patrick spokesman declined to comment yesterday. Virgin Blue's head of commercial operations, David Huttner, said a structure for the float had not been decided.

Virgin Blue chief executive Brett Godfrey and other executives and staff were entitled to 4 per cent of the company that might be sold into a float, people familiar with the plans said.

Mr Huttner said the company had not yet appointed a primary lead manager or adviser to the float.