FIRB could shape winning bid for Virgin Australia

Key issues to be considered by FIRB will be what plans the bidders have for Virgin’s 10,000 staff and which existing routes might be kept. Picture: AFP

As the four shortlisted bidders hunker down in virtual discussions with Virgin’s administrators and management this week, the foreign investment review processes are ticking away in the background.

While the administrator, Deloitte’s Vaughan Strawbridge, will want to see a bid which means the smallest haircut for Virgin’s $7bn in creditors, the decisions of the Foreign Investment Review Board, then Treasurer Josh Frydenberg, could be crucial in shaping the winning consortium, bringing in a host of other “national interest” considerations.

Under temporary changes introduced in March, designed to stop foreign bidders snapping up Australian assets at rock bottom prices during the COVID crisis, foreigners need FIRB approval regardless of value or the nature of the investment.

All four bids for Virgin are expected to need FIRB approval.

Two are from US investors with an interest in aviation — New York-based Cyrus and Arizona-based Indigo. Both do not appear to have any local equity at the moment — possibly reflecting a last minute, kick the tyres, indicative bids.

The third, Bain Capital, is a global fund management and investment firm operating from a base in Boston. The fourth is the “Team Australia” bid by BGH Capital and the $170bn AustralianSuper. But with foreign investment in its funds, including Singapore sovereign wealth fund Tamasek, which has a controlling shareholding in Singapore Airlines, it will also need to go to FIRB.

Strawbridge has made it clear he expects the short-listed bidders, which were chosen on Monday, to head off to FIRB quick smart to have the discussions needed before they go to the next stage of submitting final bids by June 12.

Given the credentials of all four bidders (aka, all respectable and experienced players) and the fact that Virgin itself was 96 per cent foreign owned before it went into administration on April 21, it seems unlikely that any of the bids would be rejected per se on foreign investment grounds.

What conditions might be put on approval?

The question is what conditions FIRB might want to put on approval for their bids.

As Treasury officials noted in their appearances before the Senate economics committee on Thursday, placing conditions on FIRB approvals has become much more the norm these days.

Five years ago or so, relatively few conditions were placed on foreign investment proposals.

These days about 40 per cent of the cases now see government imposed conditions, with the number rising up to 60 to 70 per cent if deals are assessed on a dollar basis.

Key issues to be considered by FIRB will be just what the bidders have planned for the treatment of Virgin’s 10,000 staff and which of its existing routes it plans to keep, and possibly its plans for international routes.

Politically, the government would want Virgin to keep flying to most of the places in regional Australia as it does now. It could also be expected that FIRB will require any bidder at least involve some Australian equity.

BCG has AustralianSuper and Bain already has the Future Fund as an investor in its funds.

But FIRB may well suggest that Cyrus and Indigo seek local investors are part of their bid.

One way or another, they will need to find an Australian flag to put on their bid somewhere.

BGH/Australian Super and Bain also have the home ground advantage of a long experience in the Australian market and are both well known to FIRB and Frydenberg.

Cyrus and Indigo seem to have a way to go in working out the fine detail of how their bids are in Australia’s national interest, which may be needed to put up a good case to FIRB as well as getting themselves known in Canberra.

With Virgin’s $100m in cash reserves fast running down with some 90 per cent of its fleet grounded and no certainty or signs ahead of when domestic travel will resume, (including when people from the southern states will get to fly to Queensland for their holidays). presumably the approvals by FIRB for the Virgin bidders will be put to the head of an already very busy queue.

Treasury representatives reported that FIRB has some 427 cases before it — with 160 of these coming in the last three weeks as a result of increased need for decisions “due to the zero dollar threshold”.

Good luck with that

They also said FIRB currently had the full time equivalent of just 10.8 staff working in its compliance function. So proposals by the four possible bidders named this week now have to find their way to be heard by an already stretched agency. As one might observe, good luck with that.

The government is being briefed on the process through its nominate appointee, former Macquarie CEO Nicholas Moore, which means there should be no nasty last-minute surprises.

No one wants a repeat of the political and reputational disaster of 2016 when the government was forced to step in at the last minute and block foreign bids for NSW electricity company Ausgrid — after a shortlist of two bidders (one from China and another from Hong Kong) had already been announced by the NSW government.

Given the many elements in the Virgin sale process, the government could end up shaping the bidding conditions so that its preferred bidder has the rails run in the process. The experience of bidders in the specialist business of aviation will be important factors in the decision as well as the amount of money they are prepared to pay.

The government will not want to see a gung-ho bidder winning by making all sorts of big promises — only to find themselves under pressure and unable to keep their promises down the track.

As Strawbridge himself said recently, this is a process which should only be done once — no one wants Virgin Mark 11 to collapse and have to be resold or structured again later.