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Virgin Blue to raise fresh equity, supported by Virgin Group; CEO to retire

Analysis

Virgin Blue has announced plans to raise AUD231.4 million to "improve liquidity and increase financial flexibility". The fully underwritten capital raising will be supported by Sir Richard Branson's Virgin Group. The fund raising move comes as Virgin Blue Group expected to report losses of up to AUD165 million in the 12 months ended 30-Jun-2009, though the Group forecasts a breakeven result in FY2009/2010. This is after reporting a AUD101.4 million net loss in the first half to 31-Dec-2008.

The raising is expected to increase cash balances from just AUD475 million as at 30-Jun-2009 to approximately AUD705 million. The airline's cash balance at 30-Jun-2008 was approximately AUD604 million - equating to cash burn of approximately AUD129 million, or over AUD10 million per month.

Virgin Blue CEO Brett Godfrey, who will retire "during the course of 2010", stated the move is "prudent, in the light of challenging conditions facing the airline industry". He added the company's AUD850 million in investments to develop the business and expand its route network, as well as planned JV with Delta Air Lines, would "ensure we are well placed to move quickly to participate in the upside as markets recover".

The equity raising will consist of the following offers at AUD0.20 per share (a 31% discount to its closing price of AUD0.29 on 24-Jul-2009.

  • A 1 for 1 non-renounceable pro-rate entitlement offer to raise approximately AUD210.4 million;
  • An institutional placement of approximately 105 million shares, to raise AUD21 million.

The airline's shares are currently in a trading halt. Having floated in Dec-2003 at AUD2.25 per share, the stock has been at very depressed levels following a series of ownership changes and the deterioration in the outlook for the airline sector.

The market's response once the trading halt is lifted will be crucial.

Virgin Group to tip in up to AUD80 million

The airline has been candid on many fronts, such as CEO succession, a detailed trading update and outlook and, crucially, Virgin Group's involvement.

The carrier noted its 25.5% cornerstone shareholder, the Virgin Group, has now confirmed its support for the equity raising, by commiting to subscribe for 304.9 million shares under the offer (its pro-rated share) and 35% of the Institutional Placement. Virgin Group is also acting as a sub-underwriter for 20% of the retain component. This equates to a total investment by Virgin Group of between AUD61 million to AUD79.9 million.

Earlier this month, there appeared to be differences between management and the board over a capital raising.

If there are no subscriptions under the Retail offer, Virgin Group's holding in Virgin Blue will increase from 25.5% to 30.2%.

The carrier released the following unaudited summary financial results for the 12 months ended 30-Jun-2009, showing profitable short-haul operations, but losses on V Australia's long-haul operation:

Virgin Blue unaudited summary financial results: 12 months ended 30-Jun-2009

The airline reports short-haul yields fell 2.4% for the full year (with the exception of May and June, which showed yield improvement), "due largely to the adherence to the company's New World Carrier strategy".

V Australia's losses, including start-up and forex losses, are expected to have reached up to AUD100 million in the 12 months ended 30-Jun-2009, and more red ink is expected in FY2009/2010, though this is expected to be covered by operating cash flows.

Outlook: At the mercy of the market

Virgin Blue said that, based on current market conditions, the Group result for FY2009/2010 is "expected to be breakeven", with a positive group cash flow. But it conceded the key drivers of the business - capacity, demand and fuel - remain "volatile".

Overall, it views the strengthening of the group's capital position and its mix of strategic initiatives will "position the business to weather the current market environment and move quickly to participate in the upside as markets recover".

But the loss of CEO, Brett Godfrey - the glue that has held Virgin Blue together amidst a succession of ownership changes - will be a big blow for the carrier and could weigh on investor sentiment. Here finding the right successor will be vital.

Ultimately, Sir Richard had no choice but to tip more funds into the airline to help steer it through what it describes as "the most challenging [periods] in the airline's history".

But other investors are unlikely to be enthralled by an outlook that, at best, sees a breakeven result and a CEO preparing to stand aside. At least the board has now bitten the bullet, providing some short-term respite. But the real issue to resolve is: who will become the well-funded long-term investor - ideally an airline?

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