Media Man Australia - The Online Home of Greg Tingle

Dogfight ends with Corrigan in pilot's seat - 11th September 2003
(Credit: The Age - f2)

The restructuring of the Virgin Blue shareholders' agreement underscores what an extraordinary entrepreneur Richard Branson is - and what clever and hard-nosed deal makers Chris Corrigan and Peter Scanlon are.

In less than three years Branson has turned his original $11 millionof seed capital into $500 million of cash and a half share in a $1.4
billion-plus airline.

Although he was fortunate that Ansett fell over so quickly and created an easy opportunity for Virgin Blue to grow profitably and rapidly to a 30 per cent market share, the original recognition of the opportunity and its disciplined execution by the Virgin Blue team represent a remarkable venture capital success story.

Corrigan and Scanlon were not involved during the period of highest risks and returns, but their effort in achieving a paper profit of more than $200 million on an 18-month investment would be impressive
even if they had not out-manoeuvred Branson in the process.

When Patrick Corporation bought into Virgin Blue early last year its value and prospects were uncertain. At the time Virgin Blue was considering acquiring some of Ansett's assets and wanted the capital
and financial flexibility to do so, and to fund its expansion into the vacuum left by Ansett.

Branson's Virgin Atlantic was under pressure following the September 11 terrorist attacks, and his British railway business was in trouble. Patrick's cash would have been very appealing at the time.

Branson struck what seemed to be a good deal. Patrick paid $260 million for a half share in Virgin Blue and agreed to pay $30 million more for every $100 million increase in the airline's value above $600
million.

That protected Branson in the event that Virgin Blue was wildly successful, and it wasn't unpalatable for Patrick because it would share in any escalation in value (although its exposure to value-added would be only 20 per cent).

When Virgin Blue is floated, only Branson's Virgin Group will experience dilution. Patrick will retain at least 45 per cent.

Branson is a notoriously tough dealer and has a reputation as a difficult partner. Corrigan, Scanlon and their legal advisers, Arnold Bloch Leibler, however, seem to have neatly used the value escalation
to distract him from the implications of the finer detail of the agreement.

Patrick agreed that in any future float it would sell 5 per cent of Virgin Blue but was under no obligation to sell more. Effectively the clause guaranteed that at some future point, unless Branson was prepared to live within and fund the joint venture structure in perpetuity, Patrick would gain an option on controlling the business.

For Branson to maintain a matching shareholding with Patrick, any float was limited to a maximum of 10 per cent of Virgin Blue's capital. Anything more than that would have to come out of his shareholding, leaving Patrick as the dominant shareholder.

A float of only 10 per cent of Virgin Blue wouldn't be worth pursuing.

Branson and Patrick clashed over the interpretation of the agreement. Branson gave Patrick notice of an intention to float the airline, with each partner selling 5 per cent of the capital into the float and Virgin Blue issuing shares representing another 20 per cent.

That would have evenly diluted both shareholders below 45 per cent and would have maximised the valuation of Virgin Blue, therefore Patrick's liability, under the escalation formula.

In the end the dispute was resolved in Patrick's favour. An independent arbitrator ruled that Patrick was entitled to maintain 45 per cent.Corrigan had gained a veto over any raising unless Branson was
prepared to sell down his stake or be diluted, and cede control in the process. He also gained some leverage he could use to limit Patrick's exposure under the escalation agreement.

Yesterday Patrick and Virgin Group restructured the shareholders' agreement. The escalation agreement is finished, with Patrick paying $240 million as settlement.

Patrick has limited its liabilities in relation to Virgin Blue's potential value at what seems to be a reasonable level, rather than the potentially far more expensive outcome had Branson been able to
pursue his intentions.

Patrick has also agreed to the issuing of $400 million of new capital in any public listing of Virgin Blue, the timing of which is in Branson's control. However, Patrick will no longer be required to sell any of its shares and will have the right to subscribe for enough new shares to ensure that its stake is not less than 45 per cent of the expanded capital.

When Virgin Blue is floated, only Branson's Virgin Group will experience dilution. Patrick will retain at least 45 per cent; Virgin Group will probably hold between 35 and 40 per cent (less if it sells any of its shares into the float) and Corrigan will have cemented his position as the dominant shareholder and voice in the airline's affairs.

Branson's attempt to maintain an equal shareholding signals that he really wanted to maximise his influence and his holding in a listed Virgin Blue.

The airline's future growth is unlikely to be as spectacular as it has been since inception. The easy incursions into the domestic market have been made, and this week's regulatory rejection of the proposed Qantas and Air New Zealand alliance has ensured that any expansion into the trans-Tasman and NZ domestic markets will be fiercely contested.

Branson and Corrigan clearly believe that there is considerable momentum and upside left in Virgin Blue. However, it is Corrigan who has manoeuvred himself into the pilot's seat for the next leg of Virgin Blue's amazing journey.

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