The Virgin dilemma: How to catch the IPO Mexican wave

After Guzman y Gomez so successfully employed a strategy to feed investors an hors d’oeuvre (or just a couple of tortilla chips) of shares in its float to keep them hungry for more, the market has turned its attention to Virgin and its perpetually upcoming debut on the stock market.

But dealing with the complexities of floating an airline makes selling shares in a burrito maker look like a walk in the park.

Now the latest talk that Qatar Airways is eager to become a cornerstone shareholder in Virgin brings another complicated twist. But more on that later.

For Virgin, finding the right time to float isn’t easy, and nor is finding the right shareholders.

Guzman y Gomez’s stunning 36 per cent share price leap on debut would have provided Virgin’s US owners Bain with a shot of adrenalin. GYG was something of a litmus test for the initial public offering (IPO) market, and demonstrated clearly that investors are thirsty for new floats.

However, while GYG was marketed as a $2.2 billion float, only $335 million of shares were sold into the IPO and the existing shareholders retained the rest. The constrained supply teamed with decent demand, explaining the blockbuster price.

Bain bought Virgin out of administration in 2020, injected some of its secret sauce, (a cost-cutting, fleet-consolidating, route-refining and balance sheet-enhancing exercise) and has been waiting for the opportunity to cash in some of its chips.

It’s been on the cusp of a float for more than a year now, which makes sense since its earnings were boosted by the post-COVID travel boom.

Arguably, it should have hit the IPO go button late last year, but decided the markets were still a bit skittish.

Since then, the stock market has improved but Virgin has become more complicated. To begin with, the chief executive that was spearheading the IPO marketing drive, Jayne Hrdlicka, has announced her departure. So, the airline doesn’t have a CEO, who is effectively the chief salesperson for an IPO.

Virgin’s chief customer officer and digital manager Paul Jones is reportedly the hot favourite to take the CEO job, despite protests from unions that the former Qantas chief operations officer had endorsed the (now illegal) outsourcing of ground handling jobs. On top of that, the problems with Boeing have disrupted deliveries of the aircraft on which Virgin depends.

If Qatar wants to take a 20 per cent stake in the airline it won’t necessarily derail any Virgin float. But it will inject a level of difficulty into the process, thanks to Qatar’s fraught relationship with the Albanese government.

No-one could forget the government’s ill-explained decision last year to reject Qatar’s request for additional landing rights into Australia.

It triggered a Senate inquiry that badly injured the then-head of Qantas, Alan Joyce, made the transport minister Catherine King a punching bag, and allowed a conga line of competition experts and tourism groups to accuse the government of running a protection racket for Qantas.

Since then, Qatar has reapplied to increase flights to Australia and the airline (at least) is suggesting that things are moving along well.

Allowing Qatar to increase flying into the country is one thing but giving it the green light to it become a major shareholder in our second major airline – that’s next level.

It would need the approval of the Foreign Investment Review Board, which means that it falls to Treasurer Jim Chalmers, and would be a hot potato that he wouldn’t appreciate landing in his hands.

Meanwhile, having other airlines as major shareholders presents other complexities. There have been reports that Singapore Airlines was talking about taking a stake, but that this came to nothing. There have also been suggestions that Virgin would like to see United Airlines come on to its shareholder register.

Virgin in its previous incarnation, pre-bankruptcy, had a number of foreign airlines with large shareholdings and with their own vested interests. Sure they were financial supporters on several occasions when Virgin needed capital but the then-chief executive, John Borghetti, spent much of his time herding cats.

At the time of its demise, Chinese owned HNA and Nashan each held 20 per cent, Etihad and Singapore Airlines owned a big slice and Richard Branson had 10 per cent. They were wiped out, but Branson, who licenses the rights to the Virgin name, negotiated a 5 per cent stake in Virgin 2.0.

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