Virgin, Affinity prepare sale document for Velocity

[Bagpuss]

So the basics:

1) Affinity want out
2) Virgin don't have the cash to buy the Affinity stake
3) Virgin are obviously interested in where it goes
4) If Virgin do sell some of their stake, most likely they will maintain a controlling interest

Virgin Australia do have they money, in their last reporting they had just over $1 billion of cash in the bank. If they want to spend it to buy out Affinity is the question. As per some comments buying it would be a luxury, but as Velocity is a profitable business it may make a lot of sense.

 

[HS-TQE]

Imagine if Airpoints snapped it up... (the horror)!

Imagine if QFF snapped it up

Better chance of SQ snapping it up in trade off for selling their 20% stake in VA to Virgin Group and/or Delta

By trading off VA for "VFF", SQ keeps the primary reason why they 'still' have their 20% stake in VA, the Australia FF base. Whilst also maintaining the codeshare agreement between VA and SQ in some form.

Swapping VA for VFF reduces the 'financial risk' for SQ

 

[pauly7]

Better chance of SQ snapping it up in trade off for selling their 20% stake in VA to Virgin Group and/or Delta

By trading off VA for "VFF", SQ keeps the primary reason why they 'still' have their 20% stake in VA, the Australia FF base. Whilst also maintaining the codeshare agreement between VA and SQ in some form.

Swapping VA for VFF reduces the 'financial risk' for SQ

Interesting hypothetical

 

[Punky]

Not sure if this was posted - didn't see it. A report from a week ago where Velocity tamps down the idea of selling out altogether

‘Important part of our business’: Virgin signals keeping Velocity amid float buzz

Virgin Australia chief Paul Scurrah has addressed speculation the company is considering selling off Velocity, its frequent flyer program.

www.smh.com.au

 

[AIRwin]

Reuters | Breaking International News & Views

Find latest news from every corner of the globe at Reuters.com, your online source for breaking international news coverage.

uk.reuters.com

 

[getluv]

AFR are reporting Virgin aren't in the financial position to buy the 35% back and VA will potential offer more of its own stake if it seeks to list Velocity on the stock exchange.

Virgin must really need the money. This won't be good in the long term.

 

[oz_mark]

AFR are reporting Virgin aren't in the financial position to buy the 35% back and VA will potential offer more of its own stake if it seeks to list Velocity on the stock exchange.

Virgin must really need the money. This won't be good in the long term.

I'd be surprised if they gave up a controlling stake in Velocity.

 

[Bagpuss]

Virgin must really need the money. This won't be good in the long term.

Unsure what you mean. Affinity are selling their stake. Virgin will receive $0 from the sale. Virgin will only receive money if they decide to sell off more of the company.

In my opinion, if an investor wants to purchase the Affinity stake I don’t see anything changing other than the 35% ownership change. However, if Wesfarmers buys the stake for it to be part of Flybuys, it maybe that Virgin will sell an additional stake of Velocity as part of the transaction.
The unique part of Velocity is Status Credits for many consumers. SC’s equals airline status.

 

[getluv]

Unsure what you mean. Affinity are selling their stake. Virgin will receive $0 from the sale. Virgin will only receive money if they decide to sell off more of the company.

In my opinion, if an investor wants to purchase the Affinity stake I don’t see anything changing other than the 35% ownership change. However, if Wesfarmers buys the stake for it to be part of Flybuys, it maybe that Virgin will sell an additional stake of Velocity as part of the transaction.
The unique part of Velocity is Status Credits for many consumers. SC’s equals airline status.

AFR have said (July 10 Article July 11 Article) VA is looking to sell more of Velocity if it chooses to go down the listing pathway. Given the recent announcements from VA in the past few weeks and the May update to the market, VA are having cash issues or there are other financial concerns with the company. None of the articles over the past 24 hours, or the VA release to the ASX, seem to indicate Wesfarmers is interested in Velocity. Given that Flybuys is also half owned by the Coles Group, and is itself a successful loyalty program, I sincerely doubt there'll be interested in Velocity. I would even suspect, the companies handling Affinity's sale would have spoken Wesfarmers/Coles by now. An IPO is a very expensive and time consuming process.

The reason why this is bad news, and you would have witnessed this over the past few years since Affinity has owned a minority stake, is that the shareholders have competing interests. Why would a Velocity shareholder want VA to give away more perks at a cost to them?

 

[Bagpuss]

AFR have said (July 10 Article July 11 Article) VA is looking to sell more of Velocity if it chooses to go down the listing pathway. Given the recent announcements from VA in the past few weeks and the May update to the market, VA are having cash issues or there are other financial concerns with the company.

The reason why this is bad news, and you would have witnessed this over the past few years since Affinity has owned a minority stake, is that the owner's have competing interests. Why would a Velocity shareholder want VA to give away more perks at a cost to them?

Virgin Australia in their last financials had over $1bn in the bank.
I haven’t read anything about Affinity having competing interests ... Have they taken a stake in QFF ?

 

[moa999]

Given the history of Aeroplan/Air Canada, where Air Canada ultimately sold out of Aeroplan then moved to setup a new program, cratering the value of Aeroplan.

I'd think potential investors would want.
1. Virgin to be locked into its shareholding for a lengthy period
2. Substantial disclosure of and a lengthy agreement for the availability of reward seats etc

 

[getluv]

Virgin Australia in their last financials had over $1bn in the bank.
I haven’t read anything about Affinity having competing interests ... Have they taken a stake in QFF ?

And what about the debt? VA ran to HNA a few years ago for an equity stake in order to pay off a loan and VA have already indicated the will run at a loss this year. There is a reason why Scurrah has put all projects on hold and is conducting a review of the entire business.

Competing interests i.e. Shareholders want to make a profit. Velocity members want perks. Those perks cost money.

 

[Bagpuss]

And what about the debt? VA ran to HNA a few years ago for an equity stake in order to pay off a loan and VA have already indicated the will run at a loss this year. There is a reason why Scurrah has put all projects on hold and is conducting a review of the entire business.

Competing interests i.e. Shareholders want to make a profit. Velocity members want perks. Those perks cost money.

Equity stake is not a loan OR debt. It’s buying into the business to own a percentage of the company.
Competing interests in the way in which you describe exists in EVERY loyalty program.

 

[getluv]

Equity stake is not a loan OR debt. It’s buying into the business to own a percentage of the company.
Competing interests in the way in which you describe exists in EVERY loyalty program.

VA created more shares in order to get the equity and therefore devalued the interests of other shareholders at the same time. VA then used that equity to sure up their balance sheet. This is well documented and is one of the reasons why NZ had no more time for VA. I suggest you read more into what occurred during the past three years of JB's tenure.

Your last sentence is true but the shareholders in the airline and the loyalty program are the same. Affinity when they bought into a percentage of Velocity they wanted a return on investment. There is a reason why Velocity has been devalued since Affinity came on board.

 

[Bagpuss]

VA created more shares in order to get the equity and therefore devalued the interests of other shareholders at the same time. VA then used that equity to sure up their balance sheet.

“VA” in this instance would be the board making the ultimate approval to do this .... The board mainly made up of its shareholders...

 

[juddles]

I can only comment on this whole thing as a naive, uninvolved, individual. My basic feeling is that FF programs are, in modern times, a real saviour in the eternal struggle that airlines have to be solvent. If an airline is losing control of this raises my alarm bells. Just how f..ked are they????

 

[Bagpuss]

I can only comment on this whole thing as a naive, uninvolved, individual. My basic feeling is that FF programs are, in modern times, a real saviour in the eternal struggle that airlines have to be solvent. If an airline is losing control of this raises my alarm bells. Just how f..ked are they????

The Group remains committed to the long-term growth of the Velocity business and expects to remain the majority investor in Velocity.

https://www.asx.com.au/asxpdf/20190711/pdf/446jz68wl919gq.pdf

 

[pauly7]

I can only comment on this whole thing as a naive, uninvolved, individual. My basic feeling is that FF programs are, in modern times, a real saviour in the eternal struggle that airlines have to be solvent. If an airline is losing control of this raises my alarm bells. Just how f..ked are they????

It’s clearly pretty bad and JB has been wallpapering for years now with his dream of turning VA into a full service airline to fight QF properly.

Clearly that wall paper is peeling off and major cracks are appearing. JT was brought in to bring JB back down to earth but failed and now PS has the sword with no JB to deal with and appears to have endorsement from the board to finally get in there and fix the fundamentals. The board are hardly running stellar businesses themselves these days and an annoying perpetually loss making Australian airline is just another distraction they don’t need.

If we carve away all the rotting parts of VA like Tiger, VAi, trans tasman (it’s hurting them post divorce) and the regional mess - the remaining fundamental domestic 737 mainline and Velocity is a very strong cornerstone. If they can get back there quickly and figure out what to do next I think that would be a solid strategy.

So to answer your question, if they sell a bit more of Velocity in this process (a very annoying distraction for them I’m sure) to help fund a broader plan to address all their gremlins AND start re-positioning the brand to a more profitable LCC PLUS rather than a FULL SERVICE LIGHT Lthen I think they will be fine.

 

[HS-TQE]

In the end, it's ultimately up to the board whether if they approve of PS's future direction/approach towards VA. It can only take one or two major shareholders to depart if they don't agree.

EY/HNA may agree with the LCC approach considering both groups are in complete debt themselves, but SQ may not.

In simple terms: Still too many cooks in the kitchen of the dysfunctional VA board. Which is why the likes of (DL) Delta/Virgin group, the darkhorse that is NH or the least likely case of SQ aiming for a controlling share should be the ideal approach if I was PS.

EY and HNA have too much debt and are looking at selling out rather to launch a takeover of VA. SQ are clearly not interested, have publicly stated they weren't happy with their stake in VA for some time now and are playing "decoys" (e.g pretending to be interested) if the likes of DL or NH come into play for a controlling stake in VA.

EY, HNA and SQ are probably looking for the "right price" for their stakes in VA. As for SQ's case they're probably making sure whoever buys their stake in VA pays through the nose for it.

 

[Pleb Status]

The latest 'news' today is VA is set to buy back the 35% stake of VFF owned by Affinity Equity Partners.

VFF is valued at more than $1.7B according to the article below. A 35% stake would therefore be valued at more than $595M.

There has been no indication of where the money would be coming from to fund the purchase.

Link below (paywall) -

Virgin set to fly away with Velocity stake in $2b deal

Virgin Australia is set to buy back full control of its rewards program, Velocity Frequent Flyer.

www.afr.com