Terry McCrann: Virgin confirms $4bn burnout bill
The administrators of failed airline Virgin have finally revealed the most closely guarded secret in downunder business, and it’s not good news for everybody, writes Terry McCrann.
Terry McCrann
Don't miss out on the headlines from Terry McCrann. Followed categories will be added to My News.
Three weeks ago I estimated Virgin creditors were going to lose around $5bn under the plan to sell the failed airline to the Bain vulture investor group. I suggested those creditors would be losing 90c in every dollar of their money.
The administrators of the failed airline, led by Deloitte’s Vaughn Strawbridge, have finally revealed the most closely guarded secret in downunder business.
They’ll be losing somewhere between $4.1bn and $4.6bn. That translates to between 87c and 91c of every dollar of their money.
The biggest losers are of course those holders of some $1.93bn of Virgin bonds, who made a desperate – failed – attempt to get their alternative deal done instead. They’ll be losing between $1.68bn and $1.8bn; and they’ll be losing it, cold.
They’ll have no hope – tiny as it was under their always dubious alternative – of reducing the loss over time, if their version of Virgin 2.0 had somehow managed to have flown into a gloriously profitable future.
It was always ‘good luck’ on that, just as remains also ‘good luck’ of that for the ‘winning’ acquirer, the Bain group. With both the Virgin sale deal and importantly at least the rebirth of Virgin 2.0 now done deals.
Qantas and its genially pugnacious CEO Alan Joyce gave everyone one of their classic ‘reminders’ of how tough that it going to be – that Qantas will be roiling out the red, and I mean red, carpet to ‘welcome’ Virgin 2.0 – by sacking another 2400 ground staff on top of the 6000 announced earlier in the month.
This is ‘tooth and claw’ survival time for global aviation.
Even if Joyce wanted to – and, just to stress the point, he doesn’t – there is no way he could make room for a cosy duopoly for the Virgin 2.0 that Virgin 1.0 certainly didn’t have in much ‘cosier’ times.
This emphatically reinforces the core point: the administrators are presenting Virgin creditors with the even more classic offer they cannot refuse.
They quite literally can’t refuse it. If they knock back the scheme proposed by Deloitte, all the assets are automatically sold to Bain anyway – and instead of getting 9-13 in the dollar back, those creditors would only get 4-7c in the dollar back.
Buying the structure as opposed to just the assets is a better deal for Bain. It picks up all the Virgin IP, its airline relationships, its airport slots, its ticketing system, any other brand investment and of course the tax losses in and across the corporate structure.
So it has put another $300m or so into the creditor pot in return for that. But trust me – or better still, trust Bain greed – it intends to get much more than $300m back from getting the structure as opposed to just the assets.
We of course don’t know the numbers that Bain are working off; and it will have to put at least $600m more of its of its ‘own’ money into the continuing Virgin 2.0. And that’s just upfront: who knows how much good money it might end up having to send after bad.
But when they sealed the deal back in June, they would have been working off a challenging but (hopefully) relatively clear flight path for Virgin, for Australian aviation, and for global aviation.
They would not have been anticipating the Victorian quarantine debacle – far less Premier Daniel Andrews’s grab for a further 12 months on the state of emergency, which could close or severely curtail the critical Melbourne-Sydney route for who knows how long.
Bluntly, Deloitte would not get the same deal out of Bain today. So even if it was not ‘done’ and unable to be ‘undone’, it would still be a deal that Virgin creditors could not ((sensibly) refuse.
Just to further underline this, Deloitte put in a comparison of what would happen if Virgin ended up with no deal at all – that the airline had to be completely liquidated.
In that scenario, the unsecured creditors would get just a single cent in the dollar. Further, the Virgin staff – who are either going to be employed by Virgin 2.0, with their entitlements transferred to the, at least initially, much more financial solid balance sheet, or paid out with their entitlements in full – would all end losing 80c in the dollar.
So, let the future and the battle begin. At the moment, they are both – Qantas and Virgin – in the red corner.
As I noted the other day, Qantas has two huge advantages: its frequent flyer program and Joyce.
But Virgin 2.0 also has two significant advantages. It can and has walked away from both international and all the aircraft, staff and other costs associated with that. Qantas can’t; so it’s mothballed.
Secondly, Virgin 2.0 start ruthlessly and painlessly pruned – the creditors are paying those bills -and focused.
But just like Qantas it does need to gets its planes into the air.
TIME TO GO
There’s another reason to get the deal done next week – it would get rid of them, Deloitte.
Up until June the administration had soaked up a tasty $38m in fees – $13.4m to Deloitte, $8.7m to lawyers, and a solid $16m in “advisor costs”.
That could easily be matched since; so it starts to add up to real money against the $600m tops that is estimated to flow to creditors.
Two points. It has been complicated, very complicated. And In my view, Deloitte has done a good deal.
But, it is time to go.
Originally published as Terry McCrann: Virgin confirms $4bn burnout bill