‘Five elephants in the room’: Virgin Australia dances ownership tango

After years of speculation and minority shareholder angst, Virgin Australia last year confirmed what many had long taken for granted: privatisation was on the cards.
Nanjing Night Net

With less than 9 per cent of its shares traded freely on the stockmarket, the carrier is firmly in the control of its five largest investors, and in November chair Elizabeth Bryan said the board was acting in the best interests of all shareholders by exploring privatisation.

Virgin has not updated the market since, declining to comment when contacted this week.

Etihad Airways owns 21 per cent of Virgin, along with Singapore Airlines (20 per cent), Chinese conglomerates Nanshan (19.9 per cent) and HNA Group (19.8 per cent), and Richard Branson’s Virgin Group (10 per cent).

Going private would free Virgin from the burden of quarterly reporting, and the accompanying scrutiny, as it tries to fly out of a bumpy transformation period.

But some say its public company structure has kept the competing interests of Virgin’s rival airline owners in check.

Albert Wong, the Sydney stockbroker and corporate adviser who negotiated Nanshan’s purchase of its shares from Air New Zealand in mid-2016 for $260 million, said a major ownership shake-up was a key premise behind that investment.

“The share register was basically five elephants in the room,” Mr Wong told Fairfax Media.

“It was a structure that’s just not sustainable long term, so either it would be privatised or possibly taken over at some stage by one of the major players.”

While stressing he could not talk on behalf of Nanshan, he said the Chinese group was a “passive investor” in Virgin that would give due consideration to any privatisation offer.

“Clearly the value of Virgin is not reflected in the share price, even though it’s had a bit of a jump in the last four or five months,” Mr Wong said.

After trading at 49?? in early 2016, Virgin’s shares had tumbled to a seven-year low of 16?? by mid-2017.

Talk of privatisation, and the potential for smaller investors to receive a premium for their shares, have seen them shoot up to 27?? since November.

There are several pathways to a private Virgin, including the company mopping up the $200 million or so worth of shares in free float itself in a management buyout.

Chief executive John Borghetti would sell his shares, worth about $2.7 million at current prices, in that scenario.

Takeover rules stop any of the investors immediately snapping up the free float themselves, but they could gradually increase their holding by 3 per cent every six months under “creep” provisions.

Going private and no longer being contained by takeover provisions would open the door far more to significant deal making between the remaining owners. That could see one airline taking a controlling interest, subject to Foreign Investment Review Board approval.

But some of the key players are facing headaches of their own, which will probably influence if and how Virgin departs the ASX, and what it might look like as a private company.

Diogenis Papiomytis, the director of aviation at global consultancy Frost & Sullivan, said one of new Etihad chief executive Tony Douglas’ first orders of business upon starting this month would be to reassess its investment in Virgin.

The Gulf carrier has stepped backed from the international investment strategy spearheaded by former boss James Hogan, which blew a hole in its earnings and contributed to its $US1.87 billion ($2.39 billion) loss last year.

Italian carrier Alitalia went into administration and Air Berlin filed for bankruptcy in 2017 after Etihad withdrew its support for the pair.

Virgin ran at a $224.7 million net loss in 2016 and a$185.8 million loss in 2017. But it is cash-flow positive for the first time in five years and says its turnaround plan is running ahead of expectations.

Mr Papiomytis, who was part of the strategy team at Etihad that decided to invest in Virgin, said it was possible Etihad would sell its stake in Virgin in the medium term.

“Etihad has lost money from the investment … and there’s still a long way to go before they [Virgin] become sustainably profitable,” he said.

“As an investment it does not make sense, but strategically it does because Australia’s still one of the most important markets for Etihad Airways”.

Mr Papiomytis said Etihad would be weighing up whether divestment would jeopardise its lucrative code-share partnership, cede too much power to the other airlines who could draw Virgin passengers away from Abu Dhabi and towards their own hubs, or strengthen Emirates and Qantas’ partnership.

“I don’t see a very short-term divestment by Etihad in Virgin, but over the longer term I think that partnership can continue without the shareholding,” he said, adding that Etihad would “100 per cent” want Virgin to privatise.

Virgin has maintained its code-share alliance with Air New Zealand even after the Kiwi carrier sold out of its 25.9 per cent holding.

Corrine Png, CEO of Asian transport equity research firm Crucial Perspective, said that with Etihad looking more like a seller, Singapore Airlines and HNA would be the dominant players vying for control of Virgin.

The Nanshan Group owns only the fledging Qingdao Airlines, which has a fleet of 14 aircraft, while Richard Branson’s group has been stepping away from its aviation investments.

Ms Png said both Singapore and the highly acquisitive HNA would probably increase their holdings if possible.

“Now it is a deadlock of shareholdings, so in the end Virgin Australia doesn’t get anywhere because the board has so many conflicting interests,” she said.

Flights to Australia and New Zealand made up 18 per cent of Singapore Airlines’ revenue last year, according to its annual report. That made Australia more valuable to Singapore than to other Virgin investors, Ms Png said.

Singapore had enough net cash to buy the 80 per cent of Virgin it did not already own outright if needed, Ms Png said, but it only would be interested in increasing its stake to at least 50 per cent so it could command control.

At the same time, Singapore could bale out altogether if another airline increased its stake significantly, because it would lose the influence its investment was supposed to deliver.

“If there’s an overriding airline that has a much bigger stake, then there’s no point in the rest of them owning a stake,” Ms Png said.

HNA Group, meanwhile, is China’s fourth-biggest carrier but lags behind its Chinese competitors internationally, making a foothold into the booming inbound market to Australia attractive.

But it is also facing well-publicised issues. The group has come under scrutiny in several jurisdictions over its opaque ownership, and is now facing higher borrowing costs following a debt-fuelled $40 billion global spending spree.

The conglomerate is reportedly selling commercial properties to pay down debt, but its interest in aviation does not appear to have waned.

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