
Virgin Australia administrators agree to sell airline to Bain Capital - merricksb
https://www.theguardian.com/business/2020/jun/26/virgin-australia-administrators-agree-to-sell-airline-to-american-private-equity-firm-bain-capital
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9nGQluzmnq3M
The usual private equity playbook is to strip assets, load up the company with
debt, and let it plummet into the ground, which is why Bain has both the name
and reputation of a Batman supervillain.

However, Virgin Australia already has on the order of 6 billion in debt and
virtually no assets (pretty much their entire fleet is leased). It'll be
interesting to see how Bain plan to extract their pound of flesh here, when
pretty much the only feasible strategy is to build a viable competitor to
Qantas.

~~~
JumpCrisscross
> _Bain has both the name and reputation of a Batman supervillain_

And like said supervillains, this caricature is largely a fiction.

In an analysis of "European companies around their buyout event in the period
2000 - 2008," private equity was found to "select companies which are less
financially distressed than comparable companies prior to the transaction and
that the distress risks increase after the buyout" [1]. Critically, however,
"the distress risk in private equity-backed companies does not exceed the
distress risk in comparable companies three years after the buyout," and,
"despite this risk increase, private equity-backed companies do not suffer
from higher bankruptcy rates than the control group."

More broadly, an analysis of "17,171 worldwide leveraged buyout transactions
that include every transaction with a financial sponsor in the CapitalIQ
database announced between 1/1/1970 and 6/30/2007" found bankruptcy rates
around 6% [2]. This isn't exceptionally high.

Large deals get press. They also have a habit of involving overextension. As a
result, the average private equity story is about things going spectacularly
wrong at scale.

[1] [https://madoc.bib.uni-
mannheim.de/31366/1/dp11076.pdf](https://madoc.bib.uni-
mannheim.de/31366/1/dp11076.pdf)

[2]
[https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.23.1.121](https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.23.1.121)
_Table 2_

~~~
9nGQluzmnq3M
Sure, private equity can mean a lot of things, but for Bain, the caricature is
appropriate:

• 1988: Bain put $10 million down to buy Stage Stores, and in the mid-’90s
took it public, collecting $184 million from stock offerings. Stage filed for
bankruptcy in 2000.

• 1992: Bain bought American Pad & Paper, investing $5 million, and collected
$107 million from dividends. The business filed for bankruptcy in 2000.

• 1993: Bain invested $25 million when buying GS Industries, and received $58
million from dividends. GS filed for bankruptcy in 2001.

• 1994: Bain put $27 million down to buy medical equipment maker Dade Behring.
Dade borrowed $230 million to buy some of its shares. Dade went bankrupt in
2002.

• 1997: Bain invested $41 million when buying Details, and collected at least
$70 million from stock offerings. The company filed for bankruptcy in 2003.

~~~
JumpCrisscross
> _for Bain, the caricature is appropriate_

Not mounting a general defense of leveraged buyouts. Just against the point
that private equity, or Bain for that matter, tends to guide companies into
bankruptcy.

It looks like Bain did about 68 deals in the 1990s [1]. About five of them
went bankrupt, a 7% frequency. Even if we double that to 10, it's about a 15%
frequency. That's high! But it doesn't suggest a norm.

By and large, private equity-backed companies _don 't_ end up in bankruptcy.
That doesn't mean everything is perfect. But the facts don't sustain this line
of attack.

[1]
[https://en.wikipedia.org/wiki/Bain_Capital](https://en.wikipedia.org/wiki/Bain_Capital)

~~~
netcan
Since we're down to argueing degrees...

Of course it's not deterministic. If 100% (or even 15%) went bankrupt, no one
would finance them. It's impossible to get to this point.

Every deal is a snowflake, but the reductive caricature of Bain and "private
equity leveraged buyouts" is: "(1)buy a company. (2) get your money back
quickly by borrowing on behalf of the company (3) profit on your free option.

This caricature is not that far from the truth, as caricatures go, and it's a
pretty good guideline to speculations about what they plan to do with Virgin
Blue. My guess is that a covid-related bailout or stimulus will provide the
capital.

Again, situations differ, but generally these deals don't capitalize a
company... lenders do. What they bring to the table is risk tolerance and a
mercenary attitude... much of it related to the free option they are
exercising.

~~~
formercoder
How can you argue that this strategy is a “good guideline” of what they are
planning to do with this asset when it’s only been the result of 15% of
previous assets?

~~~
__s
1-out-of-6 might be high. But true, most businesses that are having to sell
out are probably on their way out, so maybe 1-out-of-6 is low. Would have to
compare relative numbers of roi to overall business

There's also the thought that they should be making their profits from the 85%
that succeed, as opposed to not taking a loss on 15% which fail. But question
then becomes who's actually losing out on these 15%? ie who's actually paying
for the risk, since it seems like a "heads I win, tails you lose" arrangement
if losses on 15% aren't being repaid by profits from 85%

~~~
abakker
I do not think "most businesses that are having to sell out are probably on
their way out" is even remotely born out by fact.

Many businesses - Dell, Marketo, Informatica, have been bought by PE when they
wanted to restructure or change their operating models. But, those companies
are not dead or gone.

There is nuance here, and the data suggests that bankruptcy is not the end
state of every PE buyout.

------
ferros
Virgin’s unrealised value is in the government handouts and concession that
are still to come.

Virgin is the second and only competitor to Australia’s main carrier QANTAS,
and sole carrier for some routes.

The government will not let them fade away. Big money and concessions will be
forthcoming.

~~~
gindely
Why will Virgin be treated differently than Ansett? (I was pretty young when
Ansett went bankrupt, but Virgin's reputation seems to have been "trying to be
Ansett and make a duopoly again".)

~~~
thejohnconway
When Ansett went broke Virgin had just entered the market (further
undercutting prices), so there was competition to Qantas. Now what else is
there?

~~~
tomhoward
There was a rumour that the AU government was willing to let VA collapse and
hope that a foreign low-cost airline like Ryanair or Easyjet would enter the
market. But it's unlikely any airline is in a strong enough position to make
that kind of move at the moment. So they will likely offer a restructured VA
the same kind of support as they'll offer Qantas.

------
ehnto
I hadn't considered what happens when a company goes into administration, but
I am surprised that it's another private company that is assigned to
administrating it. I had always assumed it was a department in the government
that handled the process.

~~~
9nGQluzmnq3M
There's an Australian company called KordaMentha that specializes almost
exclusively in bankruptcies. (Or, at least to us laymen, never makes the news
for anything else.)

[https://kordamentha.com/restructuring](https://kordamentha.com/restructuring)

~~~
tomhoward
Funnily enough, Korda Mentha came into existence as a result of two (or
indeed, three) giant corporate collapses, one being Australia's previous
second airline.

When Ansett Airlines went into administration in 2001, Arthur Andersen was
appointed administrator, and Korda and Mentha were the partners put in charge
of the business.

Then Arthur Andersen was forced to shut down as a result of its part in the
Enron collapse, so Korda and Mentha started their own firm to handle the
ongoing Ansett work.

[https://www.smh.com.au/business/when-ansetts-balloon-went-
up...](https://www.smh.com.au/business/when-ansetts-balloon-went-up-
kordamenthas-star-rose-20111120-1npbg.html)

------
bashtoni
I hadn't heard of Bain Capital previously, but this article certainly doesn't
paint them in a good light: [https://www.rollingstone.com/politics/politics-
news/greed-an...](https://www.rollingstone.com/politics/politics-news/greed-
and-debt-the-true-story-of-mitt-romney-and-bain-capital-183291/)

~~~
rapsey
Yeah Virgin is going to be hollowed out and sold for scrap.

~~~
tomhoward
There's not much more it can be hollowed out. If it's not to continue as an
operating airline, the only assets to be sold for "scrap" are the aircraft
(they own about half their fleet), and there's not much demand for them right
now, or for the foreseeable future.

But its brand, network and operating infrastructure have substantial value, so
they'll get a much better return if they can get it operational and profitable
again.

~~~
542458
They can’t sell the airplanes for scrap, because they don’t own them - Virgin
Australia leases its planes.

~~~
tomhoward
They own about half of them according to the Forbes article below, including
four of the five 777s they operate.

But even if you're right it only enhances my point; there's little "scrap"
value in VA; it's either an operating airline or nothing.

[https://www.forbes.com/sites/willhorton1/2020/04/25/is-
virgi...](https://www.forbes.com/sites/willhorton1/2020/04/25/is-virgin-
australia-greater-than-the-sum-of-its-parts-perth-airport-seizes-planes-as-
assets-dwindle/#1600884d73df)

~~~
aryonoco
The four they own, we're fitted with small cargo doors, as opposed to standard
ones, to save pennies. Now, in a world of Dreamliners and A350s, The major
life of a second hand 77W is as a freighter, but no one wants these birds
cause they are not suitable for freight operations. So yes they own them, but
no one is going to buy them.

John Borghetti and his team made a lot of stupid decisions during their decade
at the helm. This really was the cherry on the top.

~~~
bgorman
Is there no way to retrofit a larger door onto the aircraft?

~~~
ficklepickle
I can think of two options, at opposite ends of the cost spectrum: a sawsall
and duct tape, or send it back to Boeing for modification. One of those
options is crazy reckless and the other crazy expensive. I will leave it up to
the reader to decide which is which .

