Revealed: Bain's $3.5 billion bid for Virgin Australia

Bain Capital's pitch for the collapsed airline values it at $3.5 billion, with some creditors to receive 9-13c on the dollar.

By David Flynn , August 25 2020
Revealed: Bain's $3.5 billion bid for Virgin Australia

Bain Capital put a $3.5 billion price tag on Virgin Australia in order to take control of the collapsed airline, but unsecured creditors owed around $2 billion will receive between 9c and 13c on the dollar.

Those details are contained in the Report to Creditors of Virgin Australia released this morning by airline-appointed administrator Deloitte, ahead of a September 4 meeting for all creditors to vote on Bain's buyout.

Bain will fully pay the $450 million owed to staff and the $2.3 billion of debt held by secured creditors, and also honour all travel credits as 'Future Flight' credits for bookings up to 31 July 2022 and travel to 30 June 2023.

However, 6,500 unsecured creditors – a group which includes the rebel bondholders who sought to present their own plan and derail Bain in the process – will, as expected, take a haircut to the tune of losing between 87c and 91c on the dollar.

Shareholders in the airline, including the likes of Singapore Airlines, Etihad Airways and Sir Richard Branson's Virgin Group, will receive nothing.

As previously reported, Bain also stumped up $125 million "to allow the business to continue to trade from 1 July 2020 to completion of the sale transaction," the report says.

Critical of Virgin's past strategy

In charting the airline's bumpy history, the report was also highly critical of the direction taken by former CEO John Borghetti, citing a "misconceived business strategy to change its business model from a low-cost carrier to a full-service airline", "the continued operation of loss-making services, routes and business segments" and a "history of under-delivering on turnaround strategies."

"Cumulative losses almost year on year from 2009 to 2020 of approximately $2.2bn" proved a continual drain on the airline,  as "during this period, revenue had continued to grow however it was not profitable growth."

“This period encompassed the change in the Virgin Group’s business from a budget to full-service airline. As evident by the year-on-year losses, the Virgin Group was unable to derive sustainable profits from this change in strategy.”

The report also shows that when the airline went into administration on April 21, it was down to $15m in cash, while Deloitte notes "there are … three days from 22 March 2020 to 24 March 2020 when the Virgin Group was potentially trading whilst insolvent."

Deloitte also reiterated that regardless of how Virgin Australia’s creditors vote on September 4, the airline will fall into Bain's hands. That meeting "will determine not who the business is sold to, but how the completion of the sale will occur, that is, by way of an asset sale or DOCA."

"If the Bain DOCA proposal is not approved by creditors at the Second Meeting, the sale to Bain will be completed under an asset sale agreement.”

PREVIOUS [August 24, 2020] | Bain Capital is all but certain to win control of Virgin Australia in the coming fortnight, following a decision by rebel bondholders of the collapsed airline to push the eject button on their audacious counter-bid.

With its last remaining challenger sidelined Bain is now on final approach to take over the airline for which it actually began paying the bills two months ago, when administrator Deloitte chose the US-based investment giant after Cyrus Capital withdrawal its competing bid.

Two key dates loom on the calendar.

How much did Bain offer for Virgin?

Tuesday August 25 is when Deloitte will share with the airline's estimated 12,000 creditors – ranging from bondholders and aircraft leasing firms to landlords, suppliers and employees – its full report on Bain Capital's proposal and the 'deed of company arrangement' to buy the company out of administration.

This will include how much - or perhaps how little – they can expect to receive on the estimated $8.6 billion they're owed, with some forecasts pegging this as low as 10c in the dollar.

Deloitte's portfolio will also reveal exactly how much money Bain Capital will pay to take over Virgin Australia: a figure that's bound to be of interest beyond the creditor's circle.

Virgin Australia CEO Paul Scurrah says Bain's backing will enable the airline "be a fierce competitor for years to come."
Virgin Australia CEO Paul Scurrah says Bain's backing will enable the airline "be a fierce competitor for years to come."

It's noteworthy that August 25 is exactly 18 weeks since the airline, weighed down by that debt and the impact of Covid-19 on travel, entered administration – testament to Deloitte's aims to fast-track the 'rescue and recovery' process, especially as Virgin was quickly running out of money.

That deal saw Bain inject $125 million urgently needed to keep Virgin cashed up until September, when the creditors will cast their vote on Bain's pitch.

Friday September 4 will see the creditors virtually meet to accept or reject the Bain Capital plan submitted by Deloitte.

Votes will be cast in two groups: the largest number of creditors (more than half the number of creditors) and the creditors with the largest value owed (more than half the total debt).

Bain's flight path to Victory

The first is easily Virgin's 10,000-strong workforce, and airline CEO Paul Scurrah is urging staff to vote in favour of Bain’s blueprint, saying "Bain Capital remains 100 per cent committed to completing the sale and enabling us to be a fierce competitor for years to come with them as our partner."

The second is a somewhat closer call, with unsecured bondholders making a significant part of the overall debt pile, but the majority is what counts.

In a statement issued over the weekend, Bain Capital said it "encourages all creditors to support its Deed of Company Arrangement in order to bring an end to this period of uncertainty and enable the rebuilding process to start as soon as possible."

If both groups give the thumps-up, Bain Capital will have won the necessary support from 'a majority in number and value' to move ahead with its plans for Virgin Australia 2.0.

If only one group – either the majority in number or the majority in value – bends the knee to Bain, the chair will have the deciding vote: and as a representative of administrator Deloitte will chair the meeting, that vote is certain to be cast for Bain.

In the unlikely event that both groups choose to reject Bain's plan, the conditions of Deloitte's initial sale and implementation deed from June 26 still hand the airline to Bain Capital via an asset sale agreement.

Deloitte's Vaughan Strawbridge, who leads the Virgin Australia administration team, says that an asset sale "will take significantly longer to achieve, and be a costly exercise. The return to unsecured creditors is expected to be significantly better if terms of a DOCA are approved by creditors at the second meeting."

Also read: Bain's 'rescue and reboot' plan for Virgin Australia revealed and How Virgin Australia 2.0 plans to win back business travellers

David

David Flynn is the Editor-in-Chief of Executive Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.

05 Mar 2015

Total posts 108

So Deloitte stitched this up so that Bain will win no matter what. Probably very sensible and as professional as you'd expect given the stakes here. I for one will be happy to put the past many months behind us so that VA can get on with things. Qantas is always a better airline when it has a good competitor!

Would be interesting to see where Virgin 2 will be in 5 years time, wouldn't surprise me if they fold up again. Than it will be time for a new airline with new aeroplanes, not boring out of date 737's. 

think Virgin will be in a much better place than qantas. It's all about who has the lowest costs & think Rex will be very strong, possibly the biggest or 2nd biggest on the golden triangle.

Big question is how much will Deloittes be paid of creditors money ?

20 May 2020

Total posts 5

I think 5 years is optimistic.  First thing Bain will do, as all other Venture investors do, is to turn their investment into a secured loan from V2 so they are top of the list if (when) V2 folds.  They will then "cherry pick" those routes that are or can be profitable such as the golden triangle and a double daily to other capital cities - Adelaide and Perth. Next look to see if there are any other routes that can turn a profit.  After all Bain would like to recoup their investment and QANTAS with a solid base is, as has been said, a good competitor. 

Joe
Joe

03 May 2013

Total posts 516

This is getting so boring.

25 Aug 2020

Total posts 4

It's undeniable - Virgin's new CEO Scurrah has been dealt a crappy hand & yet he has the audacity to open up a lemonade stand. He's a man with a plan & I like him for better than Joyce. Let's hope the new owners keep him around - isn't Jetstar's Hrdlicka waiting in the wings (pun!) to take over, backed by Bain? If Virgin intents to keep it's fun, friendly, trendy, cheeky flare ... then Jetstar's boring, unreliable & cheap seats won't be the way to do it. They may as well have sold Virgin & kept Tiger, in that case.

30 Aug 2019

Total posts 8

Bain have already confirmed that they will keep Scurrah as CEO. Hrdlicka is possibly being considered for the Chairman role.

Joe
Joe

03 May 2013

Total posts 516

Why would any self respecting exec jump a solid watertight ship onto another not at all guaranteed of staying afloat? 

25 Aug 2020

Total posts 4

I didn't mean today, but in future after reading the terrain. 

bmc
bmc

Virgin Australia - Velocity Rewards

22 Aug 2013

Total posts 169

Come what may, it will be thoroughly interesting to see what a skinned down debt free-ish (Bain being the only post admin debt holder) VA do compared to QF.

I hope VA² realise the value of their upper tier FF pool knowing many now have OW status via Qatar.

Bring on a vaccine and reopened flight corridors!

Huzzah

look at fiji air. If same schedule returns you can fly SYD/LAX direct on same aircraft via Fiji, that's brand new A359s with probably the best business class across the pacific.

You can buy any economy fare & bid to upgrade to business class with dollars, on any of the sectors.

Know a lot of people who bid only on the NAN/LAX/NAN sectors. If successful, they get to use new lounge at NAN & Qantas lounge at LAX.

CD
CD

01 Jul 2020

Total posts 2

In charting the airline's bumpy history, the report was also highly critical of the direction taken by former CEO John Borghetti, citing a "misconceived business strategy to change its business model from a low-cost carrier to a full-service airline", "the continued operation of loss-making services, routes and business segments" and a "history of under-delivering on turnaround strategies."

"Cumulative losses almost year on year from 2009 to 2020 of approximately $2.2bn" proved a continual drain on the airline,  as "during this period, revenue had continued to grow however it was not profitable growth."

The price of one man's ego, allowed to run rampant by a compliant board. Qantas board dodged a bullet!

07 Aug 2013

Total posts 7

Hints of a new name . . ?

12 Aug 2020

Total posts 8

Any word on switching Velocity to KrisFlyer. I’ve been caught with a couple of 100,000 Velocity points that were on their way to be converted to Kris. Do we think this will return as an option? 

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 241

Chances of the Velocity <> Krisflyer points swap returning will be very little to none.  It was only applied because SQ was a part owner at the time. 

 It was also documented on how much Velocity (and by extension VA) was losing on the points swap scheme previously.

Bain will not want capital/income drained from one of the few profitable units of VAH (Velocity) to another company (Krisflyer), especially to a company where their parent (SIA/SQ) are no longer a part owner of VA.


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