Virgin share deal: willing buyer for a bitter break-up with Air New Zealand

Simmering tensions in the boardroom pave the way for a Chinese billionaire to swoop.

Elizabeth Bryan and John Borghetti held talks with Nanshan chairman Jianmin Song. Picture: Darren England.

In a meeting room in Sydney this week, Virgin Australia chief executive John Borghetti and chairwoman Elizabeth Bryan met with Jianmin Song, the chairman of Nanshan Group and younger son of one of China’s richest men.

Known by his English name Jeremy, Song is an Australian citizen who moves back and forth ­between China and Sydney, where his family owns the Riverside Oaks Golf Course in the city’s outer northwest as well the Pullman Hotel, a stone’s throw from Sydney airport.

The meeting, with Song and his long-time Australia-based adviser Albert Wong, and the executives from Virgin was to discuss Nanshan’s plans to buy most of Air New Zealand’s stake in Virgin.

The meeting was a chance for Nanshan to pepper the executives with questions as it was about to buy Air New Zealand’s $260 million holdings.

Both parties are tight-lipped about the details but Song’s aim at the meeting was to convince the Virgin executives of his family’s long-standing commitment to Australia and his role as a long-term investor in Virgin who very much wanted to work with its current management.

For Borghetti and Bryan, the meeting would have been a relief after the increasingly bitter relationship between the Virgin board and Air New Zealand, particularly its straight-talking chief executive Christopher Luxon.

The tensions, amid which Luxon has been openly critical of Borghetti’s running of the airline, had reached breaking point in March, when Luxon suddenly quit the Virgin board and Air New Zealand announced the sale of its 25.9 per cent stake in Virgin.

By all accounts, relations between Borghetti and Luxon had become poisonous. Luxon and his board at Air New Zealand wanted Virgin to cut back on its capital expenditure, which was causing so much red ink, and hopefully get rid of its CEO as well.

Luxon made it clear he felt he could do a better job of running Virgin than Borghetti.

Other board members were not happy with Luxon’s out­spokenness and what they saw was his putting Air New Zealand’s interests ahead of his role as a ­Virgin director.

Bryan, who took over as Virgin chairwoman early last year, was backing Borghetti, an urbane former senior executive at Qantas, and was prepared to stare down the demands from Luxon — a fierce rugby supporter who declared last year ahead of a Wallabies-All Blacks game: “We don’t lose to Australia at home.”

While Luxon’s leaving was a relief for the Virgin board, the question remained of what would happen with Air New Zealand’s key stake in Virgin.

Managing the board has ­always been a challenge given the different interests of the Virgin group, Si­ngapore Airlines and Middle Eastern airline Etihad.

But it was always Air New Zealand’s stake where the tensions were, given the competing interests across the Tasman and the Pacific to the US.

While Luxon and his board were looking for buyers for their Virgin stake, Borghetti and Bryan were also canvassing the global scene for new sources of capital.

When Virgin announced a strategic partnership with Chinese airline HNA early last week, it was done with no reference to Luxon or Air New Zealand, who were left to find out about the deal at almost the same time as ordinary investors.

The HNA deal, which involves a placement to the Chinese airline that gives it a 13 per cent stake in Virgin, dilutes Air New Zealand’s stake and it removed a potential buyer of Air New Zealand’s stake.

Luxon was tight-lipped when he was asked about the deal at the IATA meeting in Dublin a few days after the announcement.

But the New Zealander, who some tip to step down as CEO of Air New Zealand soon, had another card up his sleeve: his own deal to sell Air New Zealand’s stake to Nanshan, which was done at 3c a share higher than HNA bought into Virgin.

While Air New Zealand is still holding a 6 per cent stake in Virgin, the deal with Nanshan has the potential to offer Virgin a smoother ride in the boardroom than it has had for some time.

The golf-loving Song knows Australia well. The family has long bought Australian wool to process in China. Its wool processing operations in China were visited by former Australian ambassador to China Geoff Raby a few years ago.

Nanshan is a major buyer of Australian bauxite, buying four million tonnes from Rio Tinto a year. The family has been investing into Australia directly since the early 2000s and now Jeremy Song and his family have Australian citizenship. His father, Song Zuowen, founded the company in the village of Qiansong in China’s coastal Shandong province, in 1978 just as China was beginning to open up to the world.

It is now ranked as one of the 500 top companies in China. It has diversified interests in aluminium, finance, real estate, education and tourism.

In 2014 it established Qingdao Airlines, which has helped the group expand its interests in tourism and golf in China.

Australian golf officials have visited the company’s golf courses in China.

Richard Branson was in Australia last week but he does not have a seat on the Virgin board.

But insiders yesterday said he was pleased to see two Chinese airlines now investing in Virgin, opening up serious new potential for connections with the growing Chinese market.

Juggling such a wide array of different stakeholders on the Virgin will be challenging in itself but by all accounts, Nanshan wants to be a long-term player at the table.

Expectations are that it will be given a board seat once the necessary approvals are given by Chinese authorities. And Nanshan not being a Chinese state-owned enterprise, the deal does not trigger any Foreign Investment Review Board reviews.

With two Chinese and a Singaporean airline at the boardroom table, Virgin’s second language could become Mandarin.

Just how it handles all the different stakeholders will be interesting but Borghetti and Bryan are moving forward with the makings of a board that is more stable than they have had for some time.

Whether shareholders agree, and how soon they can turn around the losses, remains to be seen.