OPINION: The Virgin Australia initial public offering later this year appears to tick all the boxes for success, unless the private equity owners, Bain Capital, get greedy.
When the prospectus for the Virgin Australia initial public offering hits the streets later this year, investors can expect to read a credible story that will underpin an enterprise value in the $2.5 billion to $3 billion range.
Leading airlines in the United States have enjoyed a surge in share prices this year, with United Airlines stock up 38 per cent, American Airlines up 33 per cent, and Delta Air Lines up 17 per cent. Even the troubled Southwest Airlines is up 13 per cent.Given this backdrop, don’t be surprised if the Virgin IPO includes a global roadshow.
Qantas could end up trading at an enterprise value between 4 and 4.5 times underlying EBITDA. It has repeatedly upgraded its profit outlook since its poor June 30, 2022, financial results were released in August.It would be of enormous benefit to the Virgin IPO if, in the lead-up, local investors cottoned on to the global re-rating of aviation stocks and applied that to Qantas and Virgin.
The same thinking applies to the banking oligopoly, which competes on price but only to the extent necessary to keep the federal treasurer and regulators off their backs.It is not well known that in the period before Virgin went into administration, its shares traded at a premium to Qantas. This was strange given its deteriorating balance sheet and history of not making money.
The Velocity frequent flyer business is a hidden gem that offers the opportunity for Virgin to sell a growth angle to investors, even though, on most measures, Velocity is well behind the metrics at the Qantas loyalty business.It is difficult, but not impossible, to get an idea of the price that Bain might demand for selling Virgin back to the sharemarket., but it has about a third of the market, compared to Qantas with two-thirds.
Sydney-based Bain partner Mike Murphy said on Monday the company’s “current intention [is] to retain a significant shareholding in a future IPO of Virgin Australia”.Although Bain is issuing RFPs to eight or nine banks, it will only pick three or four banks to handle the IPO.
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