Virgin chief executive Paul Scurrah. Picture: Glenn Hunt
Virgin chief executive Paul Scurrah. Picture: Glenn Hunt

Virgin must fly without our money

The federal government has done exactly the right thing by refusing to write out a blank cheque to save Virgin Australia.

To state the bleeding obvious, it's not as if it is vital to keep the Virgin planes in the sky right now. As they say in the classics: what planes, what sky?

In the first instance it is up to Virgin's four major shareholders which own over 80 per cent of the airline's shares to save, or not save, the airline.

They are all big enough to put their hands in their pockets. Two of them are effectively foreign governments - the government-controlled Singapore Airlines and Abu Dhabi's Etihad. The other two are Chinese conglomerates - the Nanshan group and HNA.

Do we really want Australian taxpayer money to be splashed out to save two foreign governments and two Chinese conglomerates from having to put their own money on the line? The more fundamental issue is Virgin was barely on life support before the virus devastated the global airline industry.

Virgin Australia chief executive Paul Scurrah. Picture: Glenn Hunt
Virgin Australia chief executive Paul Scurrah. Picture: Glenn Hunt

Their shareholdings in Virgin had been essentially strategic plays by those groups; but the reasons they bought into Virgin had become problematic.

That raises the even more important issue of whether Virgin actually has a viable future after we return to some sort of post-virus normality.

Are we really going to have a future where even more Chinese tourists and students flood into Australia?

There are three other key points. If the major shareholders won't underwrite Virgin's finances - the fifth biggest shareholder is Virgin founder Sir Richard Branson with a 10 per cent stake and less than 10 per cent is owned by public investors - it can be put into voluntary administration.

Qantas chief executive Alan Joyce.
Qantas chief executive Alan Joyce.

This means the business could continue to operate as - well, as "normal" as you can - for the moment. It does not have to go into complete liquidation.

Secondly, if any Australian government money goes into Virgin, it has to be on the basis the government has the option to buy 90 per cent of the equity for $1.

Third, if money goes into Virgin it also has to go into Qantas, as Qantas's pugnacious CEO, Alan Joyce, has argued.

If Virgin gets $1 billion, he wants $4 billion - to match their market shares.

Bottom line: there are a lot of planes around the world that will never fly again. It's not a great time for anyone to buy an airline.



Memo to corporate Australia: despite what greedy and risk-averse investment banks tell you, it is not actually compulsory to screw over your retail and SMSF shareholders when making an urgent share issue to quickly raise additional equity.

Bathroom supplies group Reece remains the standout in showing how not to rip off your retail/SMSF holders; and I confidently repeat my prediction that at the end of this grubby ASIC/ASX-mandated exercise it will be the only standout.

Indeed, extraordinarily, Reece actually structured its (cleverly opportunistic) share issues - insto placement, pro-rata issue, SPP - to favour its retail/SMSF holders versus the instos.

Most companies only have an SPP to retail when they have had an insto placement, as QBE did on Wednesday.

But with Reece, its SPP mimics the insto placement and allows retail/SMSF holders to subscribe for up to $30,000 of shares at $7.60 compared with Wednesday's $8.90 closing share price, in addition to subscribing for shares at the same price in the pro-rata issue to all the holders.

As I suggested last week, and in contrast to most of the other very limited SPP exercises we have seen so far, the Reece SPP is open ended. It does not set a fixed amount to be raised.

Reece does reserve the right to scale it back - both the overall amount and so each individual subscription.

Reece is the nation’s largest plumbing supply chain. Picture: Anna Rogers
Reece is the nation’s largest plumbing supply chain. Picture: Anna Rogers

But I would expect it to do that only in very unlikely circumstances.

Bottom line: a Reece retail/SMSF holder who subscribes for shares in both the SPP and the pro-rata issue will emerge ahead better in percentage terms than an existing insto holder which took up its shares in both the insto placement and the pro-rata issue.

This is quite mind-boggling. It defies all the "rules" of the capital market which are designed to benefit the insiders - the IBs, the investment banks, the ASX itself - at the expense of those troublesome retail/SMSF investors. QBE's "conventional" placement plus SPP provided the contrast. The instos got to subscribe for $US750 million ($1170 million) of shares at a price of $8.25 each. Retail/SMSF can now subscribe for only $US75 million ($117 million) at the same discounted price relative to market.

First, it is not an outrageous discount to market of $8.79 - just 6 per cent. QBE gets an additional tick in that it was done exclusively to existing insto holders; and indeed that it was done pro-rata to their existing holdings.

Now, the latter is something I find hard to exactly believe, as it would have needed every insto holder to subscribe. But at least and importantly, by limiting it to existing insto holders, QBE did not hand out cheap (or rather, cheaper) shares to outsiders.

But then QBE went and spoiled it all by reserving the right to scale the SPP amount down from $US75 million. That threatens to disadvantage retail versus the instos. And it is also just very silly, given how small the discount is.


Originally published as Virgin must fly without our money