Qatar Airways to acquire 25% of Virgin Australia

[justinbrett]

The CEO seems pretty confident of an IPO happening this year and says the wet lease will help them financially

I doubt VA will lose money on the lease but probably won’t be making a whole lot. They should pick up some extra codeshare revenue on the onwards services.

Although for all the talk of JH recently about the new services bringing in extra tourists, I still can’t see if/how you can book ex Europe (eg LHR-DOH-SYD). Doesn’t work on the VA website and other sites only give QR options. That’s a bit of a fail IMO.

 

[Digicola]

The CEO seems pretty confident of an IPO happening this year and says the wet lease will help them financially

If they really paid 1bn for the 25% stake it puts quite a pretty valuation on VA in preparation for an IPO…

 

[RooFlyer]

Meanwhile, VA2.0 have the managing the ongoing cost of these wet leases through their books - that won’t look pretty. Forget an IPO for at least 5 years.

Big call! I wonder what the cost of a wet lease is versus acquiring aircraft (one way or another) and staffing them etc. The QR buy-in defacto valuation will account for, in investor eyes, the wet lease costs.

If they really paid 1bn for the 25% stake it puts quite a pretty valuation on VA in preparation for an IPO…

Exactly. And both the Australian aviation market and aviation equity values are very good at the moment, so waiting for too long risks that one or the other declines and the value of the float also declines, or at least investor appetite decreases.

The exception being that if Bain makes another placement to another investor, say a US or Canadian pension fund, they may be prepared to hang onto a much smaller holding.

 

[ben95]

I doubt VA will lose money on the lease but probably won’t be making a whole lot.

of all the speculations this is probably the right one. Bain will nickel and dime the wine in the lounge, they aren’t stupid enough to willingly let a minority stake partner have a free cash withdrawal right.

the new services bringing in extra tourists, I still can’t see if/how you can book ex Europe (eg LHR-DOH-SYD

I think she was referring to the theoretical economics benefit of these extra capacity in and out of Australia combined with downward pressure in airfare stimulating inbound tourism. As you mentioned you can’t directly booking these flight with VA if originating from Europe (though can do via the QR codeshare)

 

[justinbrett]

If they really paid 1bn for the 25% stake it puts quite a pretty valuation on VA in preparation for an IPO…

Only worth what someone is willing to pay for it - making an assumption about total valuation is flawed, especially for a company with minimal tangible assets.

VA1 shares got down to about 9c I think, which shows how much you can lose on an investment like this.

That said QR is likely motivated for its own self interest and isn’t too concerned about the actual investment. 1B for Qatar is loose change.

 

[RooFlyer]

Only worth what someone is willing to pay for it - making an assumption about total valuation is flawed, especially for a company with minimal tangible assets.

Pricing untraded equities via an investment of a third party is a very common rule-of-thumb by brokers and analysts as to what people will pay. As a valuation yardstick today, its good. Also, the amount of tangible assets is frequently not considered important by the market - its the future potential (upside) that is for sale. If the market was entirely rational, it would be a much smaller market!

The value of QR's investment paid to Bain, is much more than the cash amount.

 

[justinbrett]

The value of QR's investment paid to Bain, is much more than the cash amount.

Clearly the return on QRs investment is not the stake in VA itself but what that stake allows QR to do in the Australian market.

That’s not going to be the same for other investors. Not to say there isn’t any value but you can’t just extrapolate what QR paid for the other 75%.

 

[SYD]

The value of QR's investment paid to Bain, is much more than the cash amount.

Absolutely for QR but probably marginal for VA.

It’s already been mentioned multiple times that booking those flights via VA is orders of magnitude more expensive than booking via QR. ie the markup VA has to put on their own flights to make some sort of profit is huge.

It’s really going to be a horrible distraction to the accounts of a primarily domestic airline that otherwise seems to be doing ok post their near death experience.

 

[RooFlyer]

Absolutely for QR but probably marginal for VA.

It’s already been mentioned multiple times that booking those flights via VA is orders of magnitude more expensive than booking via QR. ie the markup VA has to put on their own flights to make some sort of profit is huge.

It was the value of the deal for Bain referred to. To have a world class airline like QR put its stamp of approval on the enterprise by buying 25% for a reported pretty big figure means a recognised imputed value for the rest of the enterprise under the current conditions has been set. Up to that point, the value of the thing was really only in the minds of Bain management. You could use an industry average PE as a guide, but the result on the number of shares to be issued and the applicability of an industry average (of which Qantas would be the bulk).

It will give Bain a lot of confidence in the value of further sell-offs - that was much of the additional value I meant.

It’s really going to be a horrible distraction to the accounts of a primarily domestic airline that otherwise seems to be doing ok post their near death experience.

I can't see that. As far as I can tell, none of the monies QR paid will hit the airline's books, except maybe as consequent intercompany loans, as mentioned above (or some form of support). All this is going on at 'holding company' level, (remembering that there are separate 'international' and 'domestic' VA entities) not airline P&L of the operating airline.

 

[ben95]

It’s already been mentioned multiple times that booking those flights via VA is orders of magnitude more expensive than booking via QR. ie the markup VA has to put on their own flights to make some sort of profit is huge.

I'm not quite sure what the situation is, but I can also find plenty of examples where VA's price are within 30 dollars of the price on QR's website for the same VA wet-lease.

 

[SYD]

I can't see that. As far as I can tell, none of the monies QR paid will hit the airline's books, except maybe as consequent intercompany loans, as mentioned above (or some form of support). All this is going on at 'holding company' level, (remembering that there are separate 'international' and 'domestic' VA entities) not airline P&L of the operating airline.

Yes, the cash QR paid is in Bain’s pockets and would only be reflected now in the shareholder registry for VA.

I’m referring to the ongoing 5 year operations. Who knows what deal Bain did and how much say VA had into the commercial arrangements for the ongoing wet lease costs? A counter argument is the crew (at cost) will be cheaper than Oz based crew. Something that also works in QF’s favour with the AY wet leases.

 

[stm1sydney]

Doesn’t work on the VA website and other sites only give QR options. That’s a bit of a fail IMO.

Book on QR website, maybe these flights will come up as "operated by VA". Somewhat ironic.

 

[justinbrett]

Book on QR website, maybe these flights will come up as "operated by VA". Somewhat ironic.

Yes that’s my point. It’s QR getting these pax, as they already were, not VA.

 

[stm1sydney]

Yes that’s my point. It’s QR getting these pax, as they already were, not VA.

Your point was, I think, that it won't bring in new tourists, but it will. Just on QR tickets, not VA tickets.

 

[RooFlyer]

That’s not going to be the same for other investors. Not to say there isn’t any value but you can’t just extrapolate what QR paid for the other 75%.

To the first bit - certainly. Even With listed companies not everyone values the company at its current share price which is very transparent valuation .

To the second, sure you can. As I said, third-party investments into unlisted equities is a very common yardstick of overall enterprise value used in corporate finance.

It’s in the absence of any other knowledge about pricing that it’s useful. As we speak, brokers are turning out their reports saying based on assumptions of QRs investment and also XYZ, we think the enterprise value will be Q and a float of say 50% of VA will be priced at a range of A to B per share.

Think of it at this stage as going into an auction with no reserve. The very similar house next door sold recently for $1 million. That will place a yardstick value on the place being auctioned of $1 million but not everyone will see the value like that.

 

[justinbrett]

To the first bit - certainly. Even With listed companies not everyone values the company at its current share price which is very transparent valuation .

To the second, sure you can. As I said, third-party investments into unlisted equities is a very common yardstick of overall enterprise value used in corporate finance.

It’s in the absence of any other knowledge about pricing that it’s useful. As we speak, brokers are turning out their reports saying based on assumptions of QRs investment and also XYZ, we think the enterprise value will be Q and a float of say 50% of VA will be priced at a range of A to B per share.

Think of it at this stage as going into an auction with no reserve. The very similar house next door sold recently for $1 million. That will place a yardstick value on the place being auctioned of $1 million but not everyone will see the value like that.

Like I said originally - a valuation is what somebody is willing to pay for it. Someone investing this kind of money does their research and doesn’t use a real estate-esque algorithm for what they’re prepared to pay.

The lost investments of SQ, EY and VS in recent history are also data points. A legally distinct entity but the business is largely similar. A fear of it happening again has to be present. Probably why Bain hasn’t been swamped with offers.

Your point was, I think, that it won't bring in new tourists, but it will. Just on QR tickets, not VA tickets.

No that was not my point. My point is VA is not brining any inbound travellers. QR is. QR can do that itself, it’s just a work around for the capacity restrictions.

If VA was genuine about being an international airline why aren’t they selling tickets ex Europe? Sounds like they’ve got a bad deal with QR.

 

[RooFlyer]

. Someone investing this kind of money does their research and doesn’t use a real estate-esque algorithm for what they’re prepared to pay.

No kidding. I only used that analogy for anyone who didn't appear to understand "yardstick valuation"

The lost investments of SQ, EY and VA in recent history are also data points. A legally distinct entity but the business is largely similar.

What? The aviation market, the type of owner, the operating company and the buy-in mechanism are completely different VA1 Vs VA2.

SQ & EY buy-in of VA1 may be datapoints for a case-study of the ultimate failure of VA1, but are completely irrelevant to the current situation. I can't believe I had to write that.

A fear of it happening again has to be present. Probably why Bain hasn’t been swamped with offers.

Do tell! A typical strategic buy-in condition of this type is that the seller does not entertain competing offers during negotiations; an option payment is often made to formalise this. I dunno if either Bain or QR would be obliged to disclose this, if it occurred. A binding contract would probably suffice. How long has QR been talking to Bain? Quite a long time by many reports.

 

[justinbrett]

What? The aviation market, the type of owner, the operating company and the buy-in mechanism are completely different VA1 Vs VA2.

SQ & EY buy-in of VA1 may be datapoints for a case-study of the ultimate failure of VA1, but are completely irrelevant to the current situation. I can't believe I had to write that.

If you’re buying an airline and you don’t consider what the odds of it failing are, you aren’t very smart. No airline has a 0% chance of failure.

The current business model of VA is a bit different to VA1, but if QR makes it return to full service, launch widebodies and it starts looking more like VA1 vs VA2, you think the market is really that different that it could end up losing money again? Airlines after all are terrible investments.

The point was not that VA is a risk of failure but these sky high valuations based on an acquisition from a foreign state owned company with an obvious self interest don’t mean they’ll get the same rate from other investors.

I could be wrong but I seem to recall Bain offered a series of airlines (mostly VA1 shareholders) stakes in VA2 and they all declined except I think for Virgin Group (which I think was combined with a brand deal).

 

[Jacques Vert]

Airlines after all are terrible investments.

Not always; I bought QF at $0.99

What's the share price today?

 

[HS-TQE]

I could be wrong but I seem to recall Bain offered a series of airlines (mostly VA1 shareholders) stakes in VA2 and they all declined except I think for Virgin Group (which I think was combined with a brand deal).

IIRC the AFR only reported that SQ was approached (assumedly by Bain) and they declined. I would assume Bain didn't bother with Etihad or the former HNA owned Hainan.

So SQ were likely aware they would've been losing VA's "preferred partner" on Australia-Europe flights once Bain's negotiations with QR were completed.