The clock ticks loudly. The tyre-kickers are kicking about the Virgin data room; investment bankers and private equity vultures scouring for a bargain.
There are many bargains however from which to choose, dozens of airlines and hundreds of thousands of other distressed businesses around the world begging for emergency capital. Time is not on their side, it is on the side of the scavengers.
Virgin has maybe a month or two of cash left before Australia confronts an Ansett redux. The two most likely outcomes now are that a buyer emerges – only if the swathes of Virgin creditors with their myriad agendas can agree to take a haircut on their debt – or liquidation.
The liquidation of Ansett threw up more than $100 million in fees to insolvency mob Korda Mentha and more to assorted fee-takers. It dragged on for 15 years, cost taxpayers dearly in redundancy payments from government anyway and and left the flying public hostage to a dominant Qantas. There were many Ansett suicides.
Mystery flight of the Ansett accounts
The point is, if a buyer for Virgin emerges, it will demand government subsidies and special favours anyway. Qantas, Virgin and Rex already have. This will continue.
This story is about hypocrisy and disinformation and, once again, describing the most practical solution to the crisis engulfing Virgin Australia. It is also about what is most likely to happen to this country’s second carrier.
Even the business press in all its hypocritical glory has been calling for a “bail-out” of Virgin Australia. That is, an “equity injection” or a “rescue package”. Now, with the airline slipping into administration, the game is about leaks from investment bankers. It is about “deal porn”, and a fee-fest for the lawyers and administrators from Deloitte who will already be billing $10 per paper clip and a discounted $850 per partner hour.
The cleanest solution to the Virgin crisis is compulsory acquisition for fair value using section 51 of the Constitution. That is, the Government has the powers to step in now and buy the planes, the terminal leases, the landing slots and the people – the assets, not the company, not the shares. This is not a bail-out. It is an emergency measure in the public interest which would require the imprimatur of Parliament.
The government would not be running an airline. The same people who run it now would be still in their seats: the pilots, engineers, route schedulers, cabin and check in staff, baggage handlers. Indeed, everyone would still be there except the executives who loaded the airline with debt. This is not a bail-out. It’s a route by which you don’t have to deal with the creditors or the foreign shareholders. Instead, leave them to divvy up what they’ve earned; the fair value of the airline; that’s what the market says they are entitled to. It is an emergency measure in the public interest which would require the imprimatur of Parliament.
Virgin asked the Government for $1.4 billion, a request would have been accompanied by a very attractive calculation of Virgin’s enterprise value (perhaps assuming free jet fuel). Rest assured the scavengers are now blowing away the assumptions on which that valuation was based. Former Macquarie Bank chief Nicholas Moore, representing the Government, will probably have a fair idea by the weekend.
Why then has the media been crowing for a bail-out and avoiding the straight-forward solution?
One, Virgin is a big customer, spending millions a month in advertising dollars. And Virgin’s creditors, the banks, are their biggest customers, bar none.
It is the banks – a syndicate, perhaps a dozen or two, which stand to lose if the government were to step in, buy the assets, and force them to take a haircut on their $5 billion in debt. The media therefore is protecting its biggest customers and its cash-flow. (Mind you, they have just switched horses in mid-stream, now sort of falling into line with the Government’s paradoxical free markets position post the announcement of administrators.)
Virgin Australia: buy the business, don’t bail out the shareholders
Creditors will have to take a haircut anyway if a deal is to be cut with any prospective buyer. And the assets will almost certainly move into a new entity, perhaps without the perpetually loss-making Tiger. It is this negotiation now, with the deal-doers in there at the negotiating table – with their colleagues in London, Toronto and New York all cutting deals off the back of it – which is critical to Virgin’s future. Besides the gaggle of banks and bondholders, Sir Richard Branson and the four foreign airlines who control 90 per cent of the shares in Virgin Australia Holdings will also be creditors. Branson will want a return for his IP, the Virgin brand, the debt holders will be demanding their pound of flesh.
If a deal cannot be struck between all these parties, the banks will appoint a receiver to protect their position and Deloitte will switch from voluntary administrator to liquidator and Virgin will unwind, slowly and at agonising cost. Like Ansett.
Again, the spectre of false dawns looms large.
Those who recall the Ansett disaster may remember how Lindsay Fox and Solomon Lew launched their scheme to resurrect the airline, Ansett Mark II. After wedging themselves into the corporate rescue picture as Ansett’s saviours, they then exited the stage when the government refused to give them money.
Who comes first
In the sense of negotiating leverage, the banks are in a strong position because they are Virgin’s secured creditors which means, in the event of a sale or wind-up they get paid first; first after employees and the liquidator that is. Yet their interests are at loggerheads with both Virgin’s employees’ statutory entitlements and the public. Because, in the event of a sale, a lot of employees are likely to lose their jobs as the new owners cut.
In the case of Ansett, the Government picked up the tab for employees.
When Virgin, if it has not already, defaults on its loans, it pays penalty interest to the banks. So, while Virgin employees are resorting to Jobkeeper and receding hopes of working again, the banks are racking up their penalty interest payments. This means, if the business is liquidated, they end up with a bigger slice of the pie.
So too Deloitte and the lawyers. The fee-takers are paid by the hour and the longer this drags on, the more money they make. They have little interest in a quick resolution.
As the Government dithers therefore, the prospects of a rescue diminish.
Prime Minister Scott Morrison, Treasurer Josh Frydenberg and Finance Minister Mathias Cormann could act decisively and pursue the obvious solution. But they have Qantas chief Alan Joyce, half the business lobby and the banks in their collective ears telling them to stick to their economic creed and let some consortium or other strike a deal with creditors. This, despite the reality that it will come at high cost to taxpayers and thousands of Virgin employees and their families.
Do as we say, not as we do
The media narrative will reflect the interests of the banks and the politicians who have said they will “leave it to the market”; a supreme irony given the $300 billion coronavirus rescue cost.
Yet those who last week were calling for a “bail-out”, are now cheering on the chancy spectre of a corporate rescue because that is now the position of the banks and the Government.
There is ideology too. Compulsory acquisition simply does not fit with their trickle-down economic theology, despite $1 billion in taxpayer assistance already to the airline sector.
Urged on by bankers then, the Government and its proxies in the media will continue to call for taxpayers’ money to be frittered away in a process the Government cannot control, a process which favours the banks, a process which will ultimately cost this country far more than a Government buy-out. Whether a buyer emerges or not.
Plus ca change
Just as they did during the last crisis, when the Government bailed out the banks in 2009 with a deposit guarantee, a sovereign funding guarantee, a short-selling ban and a $250 billion bail-out fund (the Reserve Bank’s Committed Liquidity Facility), the business lobby is pretending their neo-liberal agenda works.
The case for protecting the stability of the banking system is strong, and indeed the latest QE (quantitative easing) program is more of the same, the government creating new money and delivering liquidity to the banks. But to claim doctrinal purity by throwing Virgin to the wolves of private equity and insolvency, and pretend that corporate welfare is not a thing, is clearly preposterous.
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Reports emerged in the salivating business press this week about private equity duo Luke Sayers and Ben Gray bobbing up in the Virgin data room. They, like the rumoured other nine tyre-kickers, are sniffing around the potential to wedge themselves into some position where they too can get their hands on some taxpayer dollars; anybody’s dollars will do.
Ben Gray, some may recall, was the banker whose private equity firm TPG ripped out $1.4 billion from the float of Myer – after selling Myer’s landmark property and swapping its cash for debt – and was then chased by the Tax Office for funnelling the profits to a tax haven.
The Government has now let these types loose on the scene. Crafty media leaks will now ensue about some amazing rescue deal about to happen. And if a deal occurs and liquidation is averted, whichever party prevails will have its paws out for taxpayer support. Routes will be closed, staff sacked when the Jobseeker teat is sucked dry, and assets will be sold.
And that’s the good outcome …