Credit Suisse fall clouds prospects for Virgin Australia’s $3bn float
The $3bn sharemarket float of Australia’s second-biggest airline Virgin has been put in doubt amid the fall of Credit Suisse and banking volatility.
Virgin Australia’s planned sharemarket float faces a delay amid global banking turmoil and sharemarket volatility, one high profile fund manager said, after it kicked off a roadshow in Asia last week.
The fall of Credit Suisse and global stock market turmoil means the float could be pushed back from its earliest start date of June by six months or beyond.
“We are in a period of instability and we are seeing cracks in the financial system,” said value-style fund manager Anton Tagliaferro from Investors Mutual.
This, coupled with rising inflation and rising interest rates, will make this deal hard to get away, Mr Tagliaferro added.
“In a bullish market they may have got Virgin away at a decent price, but today it will struggle,” he said.
Majority owner Bain Capital will face a difficult decision over the coming weeks as it takes feedback from its underwriters and potential investors, then weighs up whether the strong performance of Virgin can more than offset current equity market ructions.
The Cboe Volatility Index, an options-based indicator commonly known as the Wall Street “fear gauge,” jumped to a four-year high this past week, but near-dated contracts are more expensive than those three-months out, which may indicate traders think the market ructions may ease by then.
Reading this market will make underwriters Goldman Sachs, UBS and Barrenjoey earn their multimillion fees.
When Virgin Australia’s chief executive Jayne Hrdlicka and her top team jetted into Singapore last week to start promoting its $3bn initial public offering, they couldn’t have predicted it would coincide with the collapse of a US bank and the equity panic that ensued.
Blackrock, the world’s biggest fund manager, had just warned the failure of Silicon Valley Bank may be the start of a “slow rolling crisis” in the US financial system; while in Europe panic set in after Credit Suisse fell to a record low even after being bailed out by the central bank.
It was not a good start to the IPO roadshow that will take Ms Hrdlicka, chief financial officer Race Strauss and chief development officer David Marr to Hong Kong, London, New York, Boston, Los Angeles than to potential domestic investors back home.
Boston-based Bain stands to make a small fortune after buying Australia’s second-biggest airline from administration for $3.5bn in 2020 including equity of $731m. Equity stakes held by the Queensland government and founding shareholder Richard Branson implied a market value of $1bn at that time.
Market watchers expect the airline could have an equity value of closer to $3bn when it hits the stock market, now that it has returned to profitability.
Bain would not comment on the IPO timetable, but is expected to keep a significant shareholding in the airline. It is believed to be tapping its underwriter banks for a $450m loan to pay itself a dividend pre-IPO.
The fact Virgin has made such a sharp return to profits shows just how dramatic the post-pandemic travel boom has been for airlines.
International borders slammed shut in 2020, and in Australia airlines had the added complexity of interstate crossings also being regularly banned throughout the height of the pandemic.
But after several years of Covid-19-related losses, Qantas last month delivered a record $1.43bn half-year profit.
Virgin, which collapsed during the first year of the pandemic, has just produced its highest profit margins since 2007, pulling in estimated earnings of about $125m from first-half unaudited revenue of $2.5bn.
If the float is pushed back, that may help sell the stock to investors as it’s likely its full year earnings for the year ended June 30, 2023 will be strong.
Both airlines have benefited from soaring airfares and near full planes. Earlier this month, the competition watchdog said ticket prices had fallen from a 15-year high in December, but were still 13 per cent higher in real terms and 29 per cent in nominal terms compared to 2019.
The airline has undoubtedly come back leaner and more focused on the bottom line with a strategy focused on leisure and small to medium-sized businesses under the management of Ms Hrdlicka, who had previously run Qantas’ low cost unit Jetstar.
Before its failure, Virgin had morphed under the leadership of former senior Qantas executive John Borghetti from a budget carrier into an airline with a strong international business class offering, lounge network, and meals and baggage included in airfares, as it tried to compete head-to-head with Qantas for the higher-yielding business market.
Brisbane-based Virgin is now rebuilding its staff numbers and ordering new aircraft as it tries to take a larger share of the domestic market, but without the costs associated with running a full service airline, and without the debt wiped out by the administration process.
The Brisbane-based airline will take possession of eight Boeing 737-8 this year, taking its number of 737s to 92 from 58 when it was relaunched in late 2020. There are an additional 25 Boeing 737-10s due to arrive in 2024.
Ahead of the IPO the airline has been beefing up its board, and recently announced Peter Warne, a former chairman of Macquarie Group, and Pippa Downes, a former Goldman Sachs banker who holds a number of board positions, as its two new board members.
Mr Warne will become chairman of Virgin Australia.
More Coverage
To join the conversation, please log in. Don't have an account? Register
Join the conversation, you are commenting as Logout