Timing is everything for Virgin Australia’s $2.3bn ASX comeback

Virgin Australia is the country’s second-largest carrier with 66 domestic routes. Pictures: Brendon Thorne, Bloomberg and Nikki Short, NewsWire

Virgin Australia’s $685m initial public offering is locked and loaded for a rapid June 24 listing on the Australian Securities Exchange as a $2.3bn business, and there’s a reason why the deal time table is so quick.

Institutional investors are committed, and the book build will be wrapped up by Thursday (June 5).

The risk if advisers Barrenjoey, Goldman Sachs, UBS waited much longer, the Qantas share price may fall, and the metrics no longer look so compelling.

DataRoom can reveal that also surfacing as an advisor on the deal is Wilsons, appealing for about $100m to $125m from its retail investor clients.

The Qantas share price is up a massive 73 per cent over a year, following the collapse of regional rival Rex, and should it fall dramatically, it means Virgin’s IPO, at $2.90 a share, is no longer a 30 per cent discount to its larger rival, a price earlier flagged by this column.

It prices the deal at seven times Virgin’s net profit forecast for this financial year of $331m, which is where US airlines trade, compared to about 10 times anticipated for Qantas.

For advisers and private equity firms, timing is everything, and it was perhaps never better evidenced than with the float of online cosmetics retailer Adore Beauty amid the global pandemic, when the IPO priced the business at $635m on what were short term fundamentals

Today, it’s worth $66m.

It’s food for thought for anyone interested in buying Virgin Australia shares at what is arguably the top of the market.

Still, any deal where shares are sold at a 30 per cent discount to a competitor for an IPO is typically seen as a good one and fair.

The number of listings to come to market in Australia have been thin on the ground, and some of that is to do with private capital being prepare to out bid the equity market.

One view is that IPO investors need to accept the reality that the days of an IPO at a 20 to 30 per cent discount to a listed rival are long gone.

But now, private equity firms are largely not buying, with many reeling from problems in their own portfolios bought about by taking on too much debt.

Perhaps it puts equity investors back in the drivers seat, although maybe not for long in a falling interest rate environment.

As part of the float, private equity owner Bain Capital will reduce its holding to 40 per cent, and 30 per cent is being sold in the offer with Qatar owning 23 per cent and staff and management will own 7.8 per cent.

Bain’s holding will be in lock up until at least the 2026 financial year result, when it can sell 25 per cent before further selldowns.

Including $1.3bn of net debt, the airline will be worth $3.6bn.

The price equates to 3.4 times its forecast earnings before interest, tax, depreciation and amortisation forecast for this year of almost $1.06bn.

The smaller IPO, where cornerstone investors are locked in, follows the success of the Guzman y Gomez IPO last year with a similar structure.

DataRoom reported on Monday the Virgin IPO was shaping up to be about $700m after advisers started locking in cornerstone investors in the past fortnight.

The Dave Emerson-led business was bought by Bain Capital for $700m in 2020 after it collapsed with about $5.15bn of debt, and it’s been a lucrative investment after already pocketing over $1bn.

Virgin CEO Dave Emerson. Picture: Dallas Kilponen

Boston-based Bain Capital sold 25 per cent to Qatar Airways for about $750m last year.

Virgin Australia is the country’s second-largest carrier with 19 million passengers, 7000 staff, 66 domestic routes and the Virgin Velocity loyalty program with 11 million members.

Retail bids will come in on June 6, when the prospectus is lodged, and broker bids between June 16 and 19.