Virgin faces test on stock limits

Virgin faces test on stock limits

THE Australian Shareholders Association is pushing ahead with a complaint to the Takeovers Panel aimed at lifting the restrictions on the number of shares retail investors can take up in Virgin Australia's controversial $350 million capital raising.

The retail offer opens on Monday and ASA spokesman Stephen Mayne confirmed that the association would lodge its complaint by today.

The association believes the current structure is designed to expand the stakes and influence of the cornerstone airline shareholders - Etihad, Singapore Airlines and Air New Zealand - while diluting the influence of retail shareholders.

It wants the removal a 40 per cent cap on "overs", the additional shares retail investors can apply for above their entitlements.

It also believes that the three board seats and the increased stake of about 6 per cent that could flow to the three airlines would represent a material change in control at Virgin.

Raising the issue at the airline's annual meeting on Wednesday, Mr Mayne called on Virgin to follow the practice used in its last capital raising, in 2009, when it offered unlimited "overs". Then there had been no shortfall or dilution or the retail shareholding.

Mr Mayne told the meeting the structure of the capital raising was oppressive and against the interests of retail shareholders in favour of cornerstone investors.

"I don't think it will make a material difference to the level of underwriting because the pricing is so tight," he said. "But lifting that clause would remove the perception that it's been delivered structured to maximise the shortfall and therefore to maximise the increased relative shareholding of the three cornerstones."

A Virgin Australia spokeswoman declined to comment, but the airline issued a statement listing a number of reasons for its decision. These included its belief that it was fair and equitable for all shareholders and that there was a strong market precedent in terms of the offer being non-renounceable.

It argued the offer price was set at a discount so as to avoid an over-dilution for shareholders who do not participate and provides a pro-rata treatment for all eligible shareholders for their entitlements.

It said all existing shareholders were treated equitably in relation to oversubscriptions and the raising was only available to existing shareholders.

"There is no effect on the control of Virgin Australia, with the maximum increase in shareholding for any of the three airline shareholders being 2.1 per cent (had no shareholders taken part)."

Virgin completed the institutional component of its capital raising last week, with shareholders taking up 98.4 per cent of their entitlements, raising $281.4m, as they subscribed for five new Virgin ordinary shares for every 14 they already owned at a discounted 38c per share.

The three airlines and Virgin Group took up their full entitlements and the airlines hope to use any unsubscribed shares to boost their stakes, although this is still subject to regulatory approval for Singapore and Etihad.

The Takeovers Panel complaint is the latest twist in an explosive week that has seen Virgin and Qantas trading blows and legal threats over the involvement of the foreign carriers, all of whom have refused to comment.

It began with Qantas launching an unprecedented public relations campaign calling on the federal government to intervene in the $350m raising. It characterised the raising as a behind-the-scenes move by Virgin's government-owned or controlled foreign airline investors to cripple it domestically and internationally by reducing fares.

It wants the government to look at the Foreign Investment Review Board process that allowed Etihad, Singapore Airlines and Air New Zealand to gain major stakes in Virgin, as well as the way Virgin has set up its international arm.

It also complained that restrictions applied by the Qantas Sale Act on foreign investors looking to buy its shares meant it was not working on a level playing field.

Qantas chief executive Alan Joyce and his team took the argument to Canberra, lobbying ministers as the airline brought its employees into the fight by launching an online petition.
It also garnered the support of ACTU and its pilots union.

Qantas pilots threw their weight behind the company by unexpectedly reversing their long-held opposition to amending the Qantas Sale Act and signalling they are prepared to lobby the government for change.

It was the first time the Australian and International Pilots Association had supported changing the legislation that requires Qantas to be majority Australian-owned, although it did so with a proviso that investment be channelled into Australian operations and not overseas subsidiaries. AIPA president Nathan Safe said the move was in response to a rapidly changing aviation environment and was a response to Virgin, but not Qantas, being able to access foreign investment.

Virgin chief executive John Borghetti hit back by accusing Qantas of being scared of competition and failing to recognise it was no longer a monopoly.

Describing the accusations as "offensive and absurd", Virgin threatened legal action and yesterday Arnold Bloch Leibler partner Leon Zwier wrote to Qantas's legal counsel on the issue.
Mr Borghetti said the airline was run rationally, was well managed and its lower costs enabled it to offer lower fares.

He said he was not about to apologise for hitting the Qantas bottom line with something he argued benefited Australian travellers, the economy and ultimately shareholders.
Notwithstanding the war of words, analysts say both airlines are facing a softening market with capacity levels still high.

Macquarie Private Wealth this week dramatically downgraded its underlying pre-tax profit estimate for Qantas to a loss of $440m from a profit of $149m, blaming a weak operating environment.

Mr Borghetti said on Wednesday that Virgin had experienced a bounce in demand after the federal election but it had since tapered off. "We saw it bounce up, strangely enough, two or three days before the election," he said. "And it continued in a pretty good trend for fours weeks. And then we saw it dampen again."

Source: The Australian, Steve Creedy, 22 November 2013