It was getting close to 8pm on Thursday, April 16, when Paul Scurrah finally accepted the airline he leads was unlikely to avoid financial collapse. The Virgin Australia chief executive was attending a virtual meeting inside the makeshift office in his Brisbane home when bad news filtered through from Canberra.
Prime Minister Scott Morrison had used a television interview to declare a fix to the airline’s woes was at hand. It was not the type of solution Scurrah had been holding out for.
Morrison said his government would not get in the way of a “commercial solution” to save Australia’s second airline as it teetered on the brink of collapse. “And there are many things going on there,” the Prime Minister said.
It was the first time the Virgin camp had heard of a fix that did not involve at least some taxpayers’ cash. The interview was a clear message that after weeks of back and forth, any hope of government support was shot.
Australia’s second airline went into voluntary administration the following Monday, this week. The move that adds to the uncertainty for its 10,000 employees, many of whom have been stood down during the coronavirus pandemic, and could change the face of aviation in this country. The government’s decision to let Virgin slide into administration has also set off a multibillion-dollar race for control of the airline involving some of the nation’s most powerful dealmakers and deepest-pocketed investors. It has already pitted state governments against each other.
BGH Capital, the private equity firm led by well-connected dealmakers Ben Gray and Robin Bishop is the highest-profile investment firm in the race. Transport billionaire and airport owner Linsday Fox is also eyeing the airline, along with various international investors.
Yet while many potential buyers are circling Virgin, the government’s decision is not without political risk. Administration, a mechanism designed to allow a company to survive while also clawing back money for lenders, can be messy, as other high-profile corporate implosions such as Network Ten show.
The appointment of former Macquarie chief Nicholas Moore as an emissary for Morrison in the proceedings suggests the government is well aware of this and that it may end up being the buyer of last resort anyway.
Morrison had repeatedly signalled in recent weeks that there would be no Virgin bailout. The government did not want to set a precedent that would prompt other challenged companies to seek assistance. Nor did it like the politics of being seen to support Virgin’s foreign shareholders, which include aviation giants Etihad, Singapore Airlines and China’s HNA.
But the Prime Minister’s announcement on Thursday still came as a shock to those at Virgin who had been hanging on to hopes of support. A clip of the comment was quickly sent around to Scurrah and other senior managers, sparking a flurry of messages and phone calls.
Virgin’s management, board and bankers been working feverishly to restructure the group, weighed down with $6.8 billion in debt, so it could survive the coronavirus pandemic.
Sources close to the survival project run by investment banks Houlihan Lokey and UBS and reporting to chairman Elizabeth Bryan say Virgin had attracted nine different parties who were looking at deals to keep the airline alive. However all of the proposals hinged on some level of government support.
Scurrah, in the job for only 13 months, first wrote to Morrison on March 26 asking him for “urgent support” in the form of a $1.4 billion loan facility. Knocked back, the long-time transport and logistics executive returned with eight further proposals, the final one being for just $200 million he was convinced would buy Virgin enough time to finalise a solvent restructuring deal.
Some observers believe Team Virgin should have realised its proposals were going nowhere. “If you tell even a small child they can’t have any chocolate seven times you have to question their intelligence when they come back again,” said one senior banker. Still, despite the government signalling early on it would not provide financial support to specific companies, the Virgin camp believed there were encouraging signs and held out hope.
But the switch in rhetoric from considering “all options” to ensure Australia retained two airlines (albeit with an assurance taxpayers would not “bail out” Virgin’s foreign owners), to there being a “commercial solution” signalled that was over.
Sources who requested anonymity to discuss confidential matters said that in later talks, Morrison’s office encouraged Virgin to talk to BGH. There is also a view within the Virgin camp that BGH’s interest gave the government confidence it did not need to come to its assistance.
“BGH came to Virgin through the government,” said one source with knowledge of the events. “They’re very close to the government and were very clear and aggressive and saying: ‘you don’t need to do anything, we’ll pick it up’.”
The firm had sniffed around Virgin weeks earlier and had spoken to key figures at the airline including Scurrah and Bryan. But the two camps were at loggerheads about how the deal would be structured financially. One critic of Virgin, speaking on condition of anonymity, says the airline should have engaged more enthusiastically with BGH and other private suitors earlier. “People were told to structure bids in a way that assumed [Virgin’s] balance sheet was OK when it clearly wasn’t,” he said. “The company is losing hundreds of millions of dollars.”
Others question the view BGH had any influence over the government’s decision and describe Virgin’s reaction as “sour grapes”. They argue there was no chance Morrison would open the floodgates to other bailouts by helping the airline. They also point out the only party that clearly put pressure on the government was rival Qantas, whose chief executive Alan Joyce has said Virgin should not be rewarded for years of mismanagement. Qantas had also asked the government to proportionally match any support it gave Virgin to “even the playing field”.
At 2.15am on Sunday morning BGH signed confidentiality agreements with Virgin, giving the buyout firm access to its data room to inspect its books. BGH has $2.6 billion in it coffers and is working with heavy-hitting Melbourne lawyer Leon Zwier and outgoing PwC boss Luke Sayers. It is also backed by the nation’s largest super fund, AustralianSuper, which manages $180 billion in retirement savings and is linked to the trade union movement. Former ACTU director Dave Oliver is a director.
The BGH consortium is one of 11 groups Virgin’s administrators say are interested in buying and relaunching the airline. Deloitte partner and Virgin administrator Vaughan Strawbridge hopes to find a new owner within three months.
Buyout firms Bain Capital, Apollo and Oaktree are also said to be interested. So is US airline investor Indigo Partners, which owns a number of budget airlines across the Americas and Europe, including Frontier Airlines and Wizz Air, and which Virgin has approached in the past about becoming an investor, according to a source with knowledge of those conversations.
State governments could also play a role in determining Virgin’s future, with Queensland putting $200 million on the table and declaring it will “stop at nothing” to keep the airline in Brisbane, and NSW and Victoria expressing an interest in luring it south. Linsday Fox, who is close to Sayers, discussed a plan to bring Virgin to his privately-owned Avalon airport with Victorian Premier Daniel Andrews.
Virgin first opened its data room three weeks ago so its major shareholders could consider recapitalising the business. The only one who came close was co-founder and 10 per cent shareholder Richard Branson. Observers note he had the most to lose from Virgin’s collapse: the licence fees he gets for the Virgin brand, suggested to be worth around $15 million to $25 million a year.
At a board meeting on Monday, Virgin’s directors made the unenviable decision to appoint Deloitte as administrators. That firm was chosen a little over two weeks earlier at another meeting where there was mild disagreement about which group was best to advise the ailing airline.
Sources aware of the selection process said the board of Virgin favoured KordaMentha, given its success with administrations with large unionised workforces, while Scurrah favoured PriceWaterhouseCoopers. Unable to make a decision, they threw to CFO Keith Neate, who went for Deloitte.
Many in the Virgin camp are riled by the Morrison government’s mantra that it did not want to bail out Virgin’s foreign shareholders. They say every deal they put forward involved these shareholders being wiped out by an injection of new equity.
Their backs are also up over how much money the government has given to Regional Express Airlines, believing the mostly foreign-owned company chaired by former Nationals leader John Sharp has received the lion’s share of almost $300 million in assistance to the regional aviation industry.
“If Virgin had been given that and a government guarantee, it may well have been able to do a solvent restructuring,” said one figure close to the events.
Transport Minister and Deputy Prime Minister Michael McCormack’s assistance package of $715 million in waived fees and levies for Virgin and Qantas appears to have made little impact at a time when they are barely flying. Virgin sources said it received the first $4 million cash injection from the program on Friday.
At the same time, some investment banking sources (who declined to be named to maintain business relationships) were surprised that Virgin appeared to only be considering a rescue deal that included the government or administration and did not consider a debt-for-equity swap to rescue the company outside of administration, a mechanism used by Nine Entertainment and Slater & Gordon in the past. “I couldn’t even get them to return my call,” said one senior investment banker.
Many industry watchers now see administration as a chance for the loss-making Virgin to improve its business by ripping up bad contracts and shaking off unsustainable debts.
But forces at the opposite end of the political spectrum to the Morrison government could play a key role in determining whether that happens. Federal Labor and unions wanted the government to bail Virgin out to protect jobs and save the nation from a potential Qantas monopoly. Governments in America and across Europe have already extended billions of dollars in financial aid to their airlines as the pandemic forced them to ground operations.
The Australian Council of Trade Unions will arrange representation for Virgin’s 10,000 workers, who are owed $450 million in wages, leave and other entitlements. This could make them a decisive voting bloc when it comes to any rescue deal.
ACTU president Michele O’Neil said the peak union body would support deals that were in the best interests of workers – which meant saving as many jobs as possible in a relaunched airline. The unions would support “a buyer that has a viable plan for the long-term future for Virgin airlines, not a short term take-the-money-and-run proposal,” she said.
Meanwhile the holders of Virgin’s $1.8 billion of junk bonds are concerned they will be asked to take a much larger haircut on what they are owed than Virgin’s secured creditors – banks and aircraft lessors – and say they are “up for a fight”.
“This is not going to be as simple as everyone’s saying, and done and dusted in two or three weeks,” said one investment banker.
Business reporter at The Age and Sydney Morning Herald.
Sarah Danckert is a business reporter.