Virgin’s a cut-price carrier

BAIN Capital will only pay $700m in cash for control of Virgin Australia, well short of the $3.5bn price tag floated on the back of the second creditors report.

The actual cash being handed over is just a little short of the $726.3m equity value of the company when it called in Deloitte as the administrator in

April. Debt at the time was

$6.8bn.

Bain won’t refinance the company until after receiving formal clearance at the creditors meeting on Friday next week. But while taking on responsibility for the liabilities, actual cash changing hands is just $447m to cover unsecured creditors, with another $125m available for a profit share with the unsecured creditors.

Unsecured bond holders will get between 9c and 13c in the dollar, which compares to the 10c price of the bonds when the company called in Deloitte on April 21.

Bain has already injected $125m to keep the place afloat.

The company has received $49.3m in JobKeeper payments plus about $1.2bn in subsidised flights during the pandemic, according to the note to creditors.

Deloitte’s fees will total $26.8m, Clayton Utz and other legal costs will be $8.7m and Morgan Stanley and Houlihan Lokey will collect $16m in fees for advisory work.

Bain is taking on the risk of the airline actually making it through the pandemic but will enjoy the upside if it does.

In the past two months, it has worked with management led by Paul Scurrah, Deloitte and Korda Mentha to restructure the airline.

The 192-page report to creditors by Deloitte, released on Tuesday, outlines the reasons for the airline’s failure.

Ultimately, it was “the inability of the airline’s balance sheet to withstand the immense financial impact caused by COVID-19” that led to its downfall, but the report also examined how Virgin Australia reached that point of collapse. First, there was a “misconceived business strategy to change (the airline’s) business model from a lowcost carrier to full-service airline”, the report says.

That strategy triggered a capacity war with Qantas, which was determined to protect its territory and had the advantage of a lower cost base.

“Virgin did not have the size and financial strength to sustain this capacity increase without suffering significant losses,” the report notes.