For several months now, the long awaited Virgin Australia IPO has been confirmed and anticipated, but has not occurred yet. If the IPO window reopens in 2024, the listing may well happen later this year.
How would it go? If you are judging by the record of past Private Equity IPOs, you might say it is doomed to fail. The fact that it is in the only sector where Warren Buffett has said investors should avoid doesn’t bode well either. And some investors would remember all too well how they were wiped out when the airline went into administration 2020.
At the same time, it is a more leaner airline than it was pre-COVID and is actually profitable. Bain may not cash out all its stake, at least not right away. Demand for air travel has almost recovered to pre-pandemic highs. And Virgin has a chance to obtain disgruntled Qantas customers.
Let’s delve into all these factors.
A Virgin Australia IPO in 2024 would be the 2nd in the company’s history
Virgin Australia was founded in 2000 and has actually been listed on the ASX, joining the Australian in 2003. It has been part of the Richard Branson-founded Virgin Group and pays royalties for the use of the word, although it has otherwise not been related to either Virgin Atlantic or Virgin America (may the latter Rest in Peace). Virgin Group has a 5% stake with Bain Capital owning the balance.
The company spent the first decade or so as a low-cost carrier until former Qantas executive John Borghetti became CEO and sought to make it a competitor to Qantas. The airline captured some market share, but it made losses for several years.
By January 2020, Virgin Australia was on a mission to get back to profitability, only to be interrupted by COVID. The airline went into administration and was delisted from the ASX after Bain Capital snapped 95% of it up for about $3.5bn.
The airline is in better shape
Virgin Australia is healthier than it was three years ago. It has a more efficient fleet, with just Boeing 737s, and serves only domestic and short-haul international destinations.
The airline has just returned to medium-haul international travel by launching Cairns-Tokyo flights. Although it will use narrowbody 737s for the route, it will use the latest generation 737 MAX 8s. Three of these have been received to date and it will take delivery of 11 across CY24. The current CEO is former Jetstar boss Jayne Hrdlicka, who was hired by Bain in 2020.
And the travel industry is booming as demand that was pent-up during the pandemic was unleashed and has not waned in Australia (yet).
So what’s not to like about a Virgin Australia IPO?
Notwithstanding that the airline is in better shape than 3 years ago, we still think investors should approach a Virgin Australia IPO with caution. This is not because of the common mantra that airlines are too cyclical to invest in, nor because the travel boom might wane as economic growth slows.
Instead, we are cautious because Private Equity IPOs do not have a good track record. There are too many ASX companies spun out of Private Equity that have underperformed for several years post-listing, including Adore Beauty (ASX:ABY), SiteMinder (ASX:SDR), Myer (ASX:MYR) and Collins Foods (ASX:CKF). Granted, some have recovered, but others have not, and those that have have taken a while.
We think the main reason Bain is seeking a listing of Virgin Australia is to cash out of its ownership. Even if Bain does not sell shares at IPO, it is inevitable that this will occur at some point in the not too distant future.
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What would make us warmer towards a Virgin Australia IPO?
You might think we are just speculating that Bain will cash out, especially given its comments today that it would retain a significant shareholding in a future Virgin Australia IPO.
This does not mean it won’t sell shares – as it has a 95% stake, it could sell a significant chunk of its stake while still retaining a ‘significant shareholding’.
Even if Bain does not sell any shares at Virgin Australia IPO, or only sells a small portion of its stake, we would not be confident that Bain will be sticking around unless it entered into a long-term escrow period for its remaining stake, which it most likely won’t. Call us sceptical.
When will the Virgin Australia IPO happen?
Of course, a Virgin Australia IPO will not happen until conditions in the IPO and equity markets generally improve.
We think it will take a few successful small cap IPOs for larger companies, such as Virgin Australia, to follow through with any listing plans. Realistically, this will not be for at least another few months.
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