Virgin Australia (VAH) has moved closer to being privatised by some of its major shareholders after announcing a surprise $350 million capital raising which is equal to a third of its market value.
The surprise fund raising indicates there’s a need for quick cash at Virgin which has already shown this year a need for quick cash.
The airline revealed in late August that it had to get its big shareholders to guarantee an emergency loan after reporting a big loss for the 2012-13 financial year.
The new fund raising will hasten the day when three of the airline’s biggest shareholders – Singapore, Air New Zealand and Etihad move to mop up the rest of the company they don’t control – some 27%.
Seeing Richard Branson’s Virgin group holds a 10% stake and probably wants out sooner than later, the mop up could very well happen by the middle of next year.
All four big shareholders will support the issue and provide 73% of the $350 million being sought.
The raising will be underwritten by the airline’s three major shareholders – Air New Zealand, Etihad and Singapore – which will result in them increasing their stakes further as small shareholders decline to take up their shares.
Virgin will also talk to the big three airline shareholders about them gaining seats on its board. CEO John Borghetti is reported to have offered each a board seat when discussing the fund raising.
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Australia’s second-largest airline will issue almost 925 million shares at 38c each, which it argues will strengthen its balance sheet.
The issue will be done at a small discount to the Wednesday close for the shares of 40.5c.
Considering it’s such a huge issue, the discount is a skinny 4.6%.
But that also means that shareholders other than the big four will not face too much dilution if they don’t take up their entitlement.
Virgin chief executive John Borghetti said in a statement the capital raising was designed to improve the airline’s ‘‘liquidity and gearing position … to ensure that we are in a stronger position’’.
“It will provide the group with additional flexibility and resilience,’’ he said.
“We have recently executed and continue to explore a number of balance sheet initiatives including the sale and leaseback of our aircraft hangar at Brisbane Airport in June 2013 and the successful pricing of a US$797.3 million Enhanced Equipment Notes offering in October 2013.
“We reiterate the guidance we provided when we announced our 2013 financial year results in August. Given the ongoing uncertain economic environment, competitive challenges and market volatility, we are unable to provide profit guidance for the 2014 financial year at this time”, Mr Borghetti said.
The capital raising comes just a month after the airline sealed a $US733 million deal in the US to refinance the purchase of 24 planes it bought between 2003 and 2011.
Air New Zealand, which is the largest shareholder, will pour up to an extra $116 million into Virgin after it pledged to support the rights issue. It has 23% of Virgin, and has regulatory approval to boost it to 26%.
Singapore Airlines also has a 20% stake, while Etihad has 19%. Together with the 10% held by Richard Branson’s Virgin Group, the four largest shareholders control 73%.
Virgin’s three major shareholders provided a $100 million one-year unsecured loan in August, after Virgin slumped to a $98 million annual loss.
However, Air New Zealand said its participation in the rights issue would result in the termination of the term loan facility of $38 million from it. The loan has not been drawn down.
At the same time, reports from NZ suggest that the country’s government is about to sell 23% of Air NZ to private investors in a promised partial privatisation. That could occur in the next fortnight.
Virgin also faces the challenge of turning around the performance of Tigerair Australia, which it gained control of in July.
Air New Zealand boss Christopher Luxon said his airline ‘‘supports this initiative’’, and emphasised that it was impressed by its ability to ‘‘quickly and successfully undertake a major strategy shift to become a much more effective competitor’’.
‘‘We have endorsed that strategy from the time of our initial investment in 2011,” he said.
Virgin said the Retail Entitlement Offer will take place from November 25 to December 9.
"Eligible retail shareholders can choose to take up all, part or none of their Entitlements. Eligible retail shareholders will have the opportunity to participate at the same Offer Price and the same offer ratio as the Institutional Entitlement Offer," Virgin said.
