Virgin Australia: Cyrus Capital makes Virgin final round with BGH Capital

Bain and Cyrus Capital have been appointed as the two final candidates shortlisted to bid for Virgin Australia.

Virgin Australia administrators are looking for binding bids for the airline by June 12. Picture: AFP

Two foreign bidders will go head to head in the battle to rescue Virgin Australia after New York-based hedge fund Cyrus Capital Partners, which has had strong links to Virgin founder Richard Branson, surprisingly emerged alongside frontrunner Bain Capital in the final shortlist of bidders chosen by the airline’s administrator, Deloitte.

Coming late to the bidding process for Virgin, Cyrus effectively knocked out a strong bid from a consortium led by BGH Capital and the $170bn AustralianSuper, which at one stage had been considered a frontrunner in the bidding race.

The BGH/AustralianSuper consortium had been advising Virgin before the airline went into administration on April 21 with debts of almost $7bn.

The fourth bidder was Arizona-based low-cost carrier investor Indigo.

In a statement issued on Tuesday, administrator Vaughan Strawbridge of Deloitte said both Bain and Cyrus had been selected because they were well funded, had “deep aviation experience” and saw “real value in the business and its future”.

But he left open the possibility of other players coming back into the race “in some capacity with the remaining parties”.

Bain and Cyrus now have less than two weeks to finalise binding offers due on June 12, with the final bidder to be name by June 30.

The Australian understands that BGH’s bid was subject to several conditions, the most significant being commitments from the federal government, including to facilitate competition in the local aviation market following the devastating impact of the coronavirus pandemic.

Others involved financing and other issues.

“The conditions were on matters of substance rather than process and related to what would need to be achieved to make the airline profitable,” said one source with knowledge of the BGH ­proposal. It is understood BGH will accept Deloitte’s decision and not consider any legal avenues to return to the process.

“The only scenario they would now return under would be if one of the shortlisted bidders could not complete and the administrator contacted BGH,” the source said.

At this stage it is understood AustralianSuper is also not planning to return to the process.

Bain Capital put forward what one source described as a “very clean bid” with minimal conditions that suited Mr Strawbridge’s very tight time frame.

Mr Strawbridge is seeking to have no conditions attached to the binding implementation deal it will sign with the successful bidder at the end of the month.

Bain will now be under significant time pressure to secure agreements with aircraft lessors, unions and other significant creditors before June 30 or come to a final agreement with Deloitte that provides for adjustments to its bidding process if certain outcomes do or do not occur after June 30.

Bain is expected to relaunch Virgin Australia as a hybrid airline in the mould of the old Virgin Blue with a lost-cost base but offering airport lounges, a more integrated Velocity frequent-flyer program and regional, domestic and eventually international services.

Speaking to The Australian last week, after saying Bain wanted to “make flying fun again”, Bain Capital’s Sydney-based managing director, Mike Murphy, revealed that his firm wanted to make changes to Virgin’s Velocity Frequent Flyer scheme.

Bain is expected to negotiate to bring the Velocity and Virgin brands together in ongoing talks with Virgin Group, which currently receives about $15m a year in royalty payments from the Australian carrier.

“One thing we would love to explore is whether there could be a closer brand relationship between Virgin and Velocity,” Mr Murphy said.

“We come at that from the customer experience. Having those tied up a little closer could be a more seamless experience from both the web and app perspective for customers,” he added.

Mr Murphy noted that one option would be to have one common app and website for both brands.

He said Bain would retain the Virgin brand and revealed he would welcome Virgin Group as an ongoing shareholder in the airline following ongoing discussions on the nature of the current arrangement with Virgin Australia and “what that should look like on the other side” of the sale process.

He said the Velocity Frequent Flyer business, now 100 per cent-owned by Virgin after it bought out its private equity partner last year, had more potential.

Bain has had a team of 60 advisers working on the Virgin deal and has been assisted by former Jetstar chief executive Hayne Hrdlicka, who would be viewed as a candidate for the chief executive role or as an executive director of the relaunched airline.

The decision was made after lengthy talks over the weekend and on Monday and Tuesday morning with the final four bidders.

All the bidders put in more detailed bids on Friday.

One question that will need to be answered is the future role of Canadian infrastructure group Brookfield, which has continued to remain interested in Virgin, although it pulled out of the running for the shortlist two weeks ago over concerns over the process.

Brookfield submitted its own indicative, non-binding bid for Virgin on Friday.

Brookfield was not on the shortlist of four, but has retained a strong interest in the process and has had strong support from the union movement.

Brookfield told Deloitte on Monday that it needed the deadline to be extended by two weeks.

While Deloitte initially supported this position, it was concerned when Brookfield insisted this meant they needed to put back the deadline for final documentation by a further fortnight.

Deloitte told all the bidders in strong terms over 72 hours of negotiations that it wanted to be “off risk” by June 30, although it now appears to have secured more cash, which could keep Virgin running until August.

In its indicative bid made last Friday, Brookfield indicated that it was prepared to inject more than $500m in cash into the airline to get it flying again.

Mr Strawbridge said the administrators would now spend coming weeks “facilitating in depth bidder engagement with the stakeholders of the business and work closely with both preferred bidders in the lead up to binding offers being finalised.”