Virgin Australia expected to receive as many as 8 non-binding offers: Administrators

SYDNEY (REUTERS, BLOOMBERG) - Virgin Australia Holdings is expected to receive as many as eight non-binding indicative offers from potential buyers on Friday, which will be whittled down over the next few days to a shortlist of around three, its administrators said.

The country's second-biggest airline, which is 20 per cent-owned by Singapore Airlines, entered voluntary administration last month, owing creditors nearly A$7 billion (S$6.43 billion), making it the biggest Asia-Pacific casualty of the coronavirus crisis hitting the global aviation industry.

The administrators at Deloitte aim to agree a deal with a buyer by the end of June.

Australian media have reported private equity groups BGH Capital, Bain Capital and Brookfield are leading contenders to buy the business.

A Bain spokesman confirmed the company intends to bid. Brookfield has already lodged an offer, according to a source with direct knowledge of the matter.
Brookfield declined to comment and BGH did not immediately respond to requests for comment.

India's InterGlobe Enterprises, the biggest shareholder in that country's largest airline IndiGo, said on Friday (May 15) it was participating in the Virgin sales process but declined to provide further details.

The high-level interest in Virgin Australia at a time when the world aviation market is largely grounded shows the long-time attractiveness of the Australian domestic market, a duopoly between Qantas Airways Ltd and Virgin.

Administrator Vaughan Strawbridge said in a statement that eight of the nearly 20 parties that had accessed the company's data room had been advanced enough in their interest to be given its forward-looking Virgin 2.0 business plan.

"Up to now, we've certainly seen a high level of interest from a significant number of high-quality parties, many of whom are capable of completing a transaction of this size and complexity," Strawbridge said. "From here, we will start working even more closely with the short-listed parties."

Binding offers for Virgin are due on June 12, Strawbridge said, adding the sale timetable was aggressive but one he was confident of achieving.

Robert Martin, the CEO of BOC Aviation which leases aircraft to Virgin Australia, said it looked like the airline would survive.

"Clearly if you are one of two players in a duopoly market which is going to stay as a duopoly market for the foreseeable future it is an attractive investment," he told Reuters. "So I think Virgin Australia will probably come through."

The offers give a glimpse of how buyers think they can reform Virgin Australia's money-losing operations into a sound investment. The question for administrators is which candidate has the best chance of untangling the knot of regional politics and industry uncertainty surrounding the airline.

Virgin entered voluntary administration last month after being overwhelmed by years of losses and a severe revenue shortfall from coronavirus-related travel cancellations. Qantas Airways, the other major carrier in the country, had said it has enough liquidity to withstand current conditions until December 2021.

The reason buyers are drawn to the business is that Australia is "something of an oasis in aviation," in part because of the size of the market, according to Peter Harbison, chairman of market intelligence provider CAPA Centre for Aviation.

"It is essentially necessarily a duopoly, possibly some space for a little bit more, but it's a very valuable market," he said in an interview. "It's also quite likely to come back fairly quickly, because of the way we've handled the epidemic so far."

The strength of Australia's domestic market also makes it tempting for bidders to return the revitalized Virgin Australia to its roots as a low-cost carrier, Neil Hansford, chairman of consultancy firm Strategic Aviation Solutions, said in an interview.

The soaring air passenger traffic on the east coast routes that connect Melbourne, Sydney and Brisbane could be appealing, he said. Sydney-Melbourne is the fifth-busiest domestic route globally, with about 10 million seats a year, according to OAG Aviation Worldwide.

However, any attempt to make the reborn Virgin Australia a low-cost carrier could meet headwinds.

The head of Australia's competition watchdog, Rod Sims, has already called for Virgin to return as a full-service carrier. A bid by an overseas buyer would also be subject to scrutiny from the Foreign Investment Review Board, whose rules were tightened in March to require a review of foreign takeovers of any size.

After Friday's deadline, Deloitte will allow shortlisted bidders to prepare binding offers by June 12, targeting a deal by the end of that month. The treatment of creditors, and the indebtedness of the reborn Virgin Australia, will be a key factor in deciding the winner, according to the industry experts.

Virgin's secured creditors are owed A$2.28 billion, Deloitte said in April. If they refuse to waive enough of what they're owed, the final asking price for the airline could be as high as A$3.5 billion, Hansford said.

"If they can get it with a haircut for creditors, and it's still an operating business, it's a good buy," he said.