(Bloomberg) – Richard Branson has spent decades cultivating an image of a reckless entrepreneur, glorifying risk with stunts like skydiving or hot air ballooning across the ocean to promote everything from soft drinks to space travel. Now, less than a week from his 70th birthday, Branson is taking one of the biggest bets to save his flagship airline from the ravages of the coronavirus outbreak.
With transatlantic travel largely grounded in the foreseeable future, the company most responsible for building its global brand, Virgin Atlantic Airways Ltd., was on the verge of collapse. After begging a reluctant British government for a bailout, Branson concluded that his best option for raising money was to sell shares in Virgin Galactic Holdings Inc., the orbital tourism company that has become his obsession in recent years.
On Tuesday, Virgin announced a £ 1.2 billion ($ 1.5 billion) bailout package that includes around £ 170 million from the American hedge fund Davidson Kempner Capital Management and £ 200 million that Branson obtained by diluting its stake in Virgin Galactic.
“It is the ticket to our continued journey, and hopefully it also means a better birthday for Richard,” said Shai Weiss, executive director of Virgin Atlantic. “It has contributed 200 million, but we have helped to conclude it.”
Bitter blow
On March 24, when news came that UK Chancellor of the Exchequer Rishi Sunak had rejected an industry bailout, Branson was on Necker Island, the Caribbean stronghold from which he piloted his global empire. The decision came as a shock, as Transportation Secretary Grant Shapps had hinted that he would consider a bailout just days before.
After leaving open the possibility of a broader package, the government decided that only companies with investment grade debt would be able to access the Bank of England’s £ 330bn Covid Corporate Financing Fund. While Virgin Atlantic’s credit score is not public, it is believed that the top three rating companies consider it junk.
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Subsequently, British Airways, EasyJet Plc and Jet2 took advantage of the funds, including Ryanair Holdings Plc from Ireland and Wizz Air Holdings Plc from Hungary. Government officials told Virgin that she might still qualify for assistance, but opposition was mounting in the UK, and some politicians and newspapers argued that Branson’s residence in the British Virgin Islands, where there is no income tax. or capital gains, should prevent the government from helping.
Branson’s insistence that he had always invested his profits in new businesses, and that his companies paid taxes in countries around the world, did little to influence opinions. The government never definitively said no, but indicated that the money for Virgin would only be available if it had exhausted all other possible avenues, including loans from private institutions and funds from existing shareholders. Delta Air Lines Inc., which owns 49% of the operator, was busy dealing with the pandemic in the United States, and the outbreak had undermined the interest of most conventional lenders.
That left Branson, which owns 51% of the airline, to get the cash or risk the airline he had founded in 1984 thwarting the mighty British Airways. Since the billionaire’s fortune depended heavily on the value of his companies, Branson had little choice but to sell less vulnerable assets to save the airline.
Virgin Atlantic had suffered after the European airline industry was classified into three megagroups, leaving Branson in the cold. Delta’s invitation, followed by Weiss’ appointment as CEO in January 2019, revitalized the operator. Virgin soon ordered new planes and additional destinations such as Tel Aviv and Mumbai, celebrated with dazzling launches in which Branson flirted with passengers and enchanted big-box venues. Branson was so optimistic about Virgin’s outlook that he closed the deal in December to sell 31% of the airline to Delta Air France-KLM’s ally.
Court Investors
After Sunak’s announcement in March, Weiss contacted about 100 financial institutions seeking support. In May, at the height of the pandemic, he made a conference call from his home in West London to a dozen potential investors. The launch focused on Virgin Atlantic’s recovery plan and a strategy for profitable growth in the medium term.
A handful of companies returned with financing proposals, leading to a contest between Davidson Kempner and Elliott Management Corp. to provide a loan. While the advance promised to raise substantial cash, it remained well below the £ 500m Virgin Atlantic had originally asked the state to underwrite.
So Branson ordered the sale of a piece of Virgin Galactic, his most valuable asset on the list, while indicating that he was even prepared to mortgage his Necker Island hole. The stock sale raised more than $ 450 million, of which Branson is committing just under half to Virgin Atlantic. (He says he will use the rest to shore up other businesses.) The airline has asked creditors to defer some £ 450m in payments, and Delta has contributed to a several-year delay in bills for services like IT and marketing.
“We were excited to see the recapitalization occur,” Delta CEO Ed Bastian said in a conference call Tuesday. “It has been an extremely difficult few months to achieve this. All stakeholders have made contributions to allow Virgin to fly again. ”
Employees will pay a high price, with more than 3,000 destined to lose their jobs as Virgin shrinks to adapt to what could be years of reduced demand for long-haul flights. The airline’s most profitable links, from London to major American cities, almost closed with the accelerated pandemic in the US, which makes it dependent on less-lucrative routes like Israel and the Caribbean.
Despite the cloudy outlook, John Strickland of airline advisory firm JLS Consulting says Branson had to save the airline to protect his other interests, even if it meant loosening his grip on the space company.
“It wouldn’t have looked good to let him go,” Strickland said. Virgin Atlantic “shows its colors literally around the world, and airlines are much more a matter of public discussion than something like Virgin Galactic, as innovative as it is.”
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