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Virgin Australia administrators agree to sell airline to Bain Capital (theguardian.com)
92 points by merricksb 7 days ago | hide | past | web | favorite | 72 comments

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.

> 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

[2] https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.23.1.121 Table 2

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.

> 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

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.

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?

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%

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.

Doesn’t have anything to do with “having to sell out.” Often management gets rollover equity and participates in the upside of the deal.

I'm not arguing that bankruptcy is part of the strategy.

The strategy is about "how to buy a company for free, without downside liabilities." This, results in bankruptcy sometimes... significantly less than 15% of the time, I imagine.

What I am predicting is that Bain will leverage this asset to borrow, and use this money to pay themselves back whatever they put in. At this point they have no money in the deal... a free option.

This is just what a leveraged buyout is, and Bain does leveraged buyouts... one way or another.

Honest question here, because you seem to know the topic.. Given the risks and what everyone seems to know about how these firms operate..

Who is lending them this money? I understand when they take a company public, the literal public is giving them money, but otherwise, who typically just gives them money on such good terms that they can recoup their investment and then some..

Isn't someone just getting the PE's risk shifted onto them when they do that?

Banks, and in the last decade private lenders.

The simple answer is "because they're generally good for it." No one would invest if these companies immediately went bankrupt.

First.. lenders generally get a premium if it's a risky deal. Low risk rates are exceptionally low. There's always some demand for higher yield bonds. Supply and demand are generally unresponsive to eachother. In the current market,

Second, think "bondholders" moreso than lenders. The people who structure the deal are the initial financiers, including the PE firm. They just borrow/invest enough to ensure solvency in the first few years. Long term, bonds trade. They trade at market rates.

Also note that all these bankruptcies happened during the dotcom bust, regardless of when Bain got involved. At that point, demand for risky bonds is terrible. Business is hard, and a highly leveraged company is at risk. Highly leveraged companies tend to stay highly leveraged, so even if Bain did this to them 15 year prior... it's hard to survive bad times.

People who understand business from a purely SV/tech perspective forget that software is not normal. Outside of software, large companies usually owe money. They don't have billions of dollars lying around like FB or Google.

Exactly. These looks are made all the timer because lenders make money on them. LBOs happen all the time because most parties make money.

I would throw in a bunch of caveats...

I'm OK with "because lenders make money on them" as a generality. ...As long as we are honest about what an LBO is. It is an arbitrage, of sorts.

The deals are, by definition and in practice, structured to give the acquiring PE a free option. Their risk lasts only as long as they have skin in the game, usually a short period. Since they structure the deal, they structure it in a way that eliminates (as much as they can) short term risks.

The old fashioned way of doing this is took a few years. (a) Raise enough debt and run extreme short-term management strategies. (b) make interest payments religiously. (c) Use this history of payments to raise enough money to pay yourself out fully. (d) sell the now indebted company, run it, or whatever. Any dollar you make is profit on a zero dollar investment.

It's a risk arbitrage, more specifically. In a liquid market, this arbitrage wouldn't exist, but if it did it would look like this: (1)Buy shares in Tesla. Put it in a LLC (2) Borrow money under LLC, interest only (3) Pay this money to yourself. (4) Sell shares as necessary to pay interest (5) pay yourself when you deserve a treat (6) If you run out of shares and no one is willing to lend you more money... the game is now finished.

I don’t get it. Bain likely invested in hundreds of companies in that time frame. What conclusions can you draw from these instances? (Moreover, it looks like these companies went bankrupt in the early 2000s recession, like thousands of others.)

Another anecdote:

• 2005: Bain buys Dunkin' Donuts for $2.4B. In the ensuing 15 years, the number of stores has doubled from 6,500 to 13,000. https://www.nytimes.com/2005/12/13/business/parent-of-dunkin...

When you buy distressed companies, you are going to have a lot of failures - you can't save them all. You are also going to have enough successes to justify those failures, otherwise you won't have any LPs for your next fund.

You can add Edgars, one of South Africa's oldest, most profitable, and largest retailers to that list. They filed for bankruptcy recently in the aftermath of a botched Bain Capital 3.5bn USD buyout in 2007.


Considering the state of things in SA, I would hardly call that Bain's fault. Well, of course it's their fault, but there's a massive amount of systemic risk that is common to all companies in SA.

I'm confused how a compagny who goes bankrupt ~8 years later is supposed to be the end of the world

Using 2007/2008 studies to defend the 2010s behavior of an industry doesn’t really make sense. Imagine using a 2007 annual report to make a case, today, for why Apple will never be worth $1 trillion...

I’m glad that you’ve at least put a disclosure that you work in private equity in your HN bio, though. Kudos for that.

> Using 2007/2008 studies to defend the 2010s behavior of an industry doesn’t really make sense

In this case, it does. Bain was prominent in that time. In a vacuum of data, something is better than nothing.

Post-crisis private equity is more sober than 2000-2007. It was only about a year ago that we reached leverage ratios approaching those of the last decade's peak [1]. On a cash flow basis, most of this decade was subdued compared with that period [2].

> you work in private equity

I work on the venture capital end of the private equity spectrum. Not comparable to whole-company leveraged buyouts of Bain's style.

There are valid criticisms of private equity. It weaponizes the tax deductibility of interest, which I don't think funds should be able to use. Its fee structures are opaque. And its largest deals tend to be destructive. But heightened frequency of bankruptcy is not sustained by any data I've come across.

[1] https://www.reuters.com/article/leverage-climbs/leverage-lev...

[2] https://www.intuition.com/have-private-equity-valuations-rea...

While it's good to have some data I would be careful with the assumptions. E.g. is 3 years a long enough time horizon?

There are also very different kinds of private equity, with the bain-like 'activist investors' the most notorious for their practices. So while many might not be so bad, there are also others that are just known for their semi-legal exploitative practices.

> Bain is not found in either of those two documents

Bain's deals are covered in the second paper. (Bain is one of those "financials sponsors".)

With respect to your second link [1], "at least five companies eventually [filing] for bankruptcy after being acquired by the private equity firm" is troubling. But it looks like Bain made 68 deals in that period [2]. A 7.4% bankruptcy rate is higher than the industry average, so criticism is warranted. But it's far from the norm.

[1] https://www.washingtonpost.com/business/economy/romneys-bain...

[2] https://en.wikipedia.org/wiki/Bain_Capital

Leveraged buyout is a dirty concept to me after what the Glazer family did to Manchester United[1],[2].

They basically turned the club from the number one team in England to something to milk dry and allowing rivals to overtake. They were extremely lucky in the early years post-LBO because Alex Ferguson was in charge, one of the greatest all-time managers, who could somehow extract title-winning performances from a threadbare squad even going up against rivals who were suddenly pumped full of oil money. They installed a investment banker goon as the CEO, who doesn't understand football, who helped broker the LBO in the first place and is gradually running the club into the ground.

[1] https://www.investopedia.com/ask/answers/052715/why-manchest...

[2] https://www.reuters.com/article/us-manchesterunited-ipo/anal...

Great, but this article is not about leveraged buyouts.

Manchester United just paid a dividend. Looks like they're going to make the cut for UEFA next year. Man U is doing okay. Other Premier League teams have much scarier ownership stories.

Then maybe all they intend to do is to keep the company alive, somehow, at a minimum operating level, until such time as the Covid-19 situation is less of a concern, and then resell it to somebody else for a profit.

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.

I agree, but I‘ve never understood who the creditors are in this scenario. Why would you lend to a company when you know the VCs are going to trash it?

Are they taking on the debt? I assumed creditors would be out of luck in a situation like this.

The creditors will be the ones they are buying the company from.

Gate and landing slots are my best guess as to what their remaining assets are - but with the downturn in air travel and the fees to maintain them, they seem more like liabilities.

Maybe there’s a nice pile of customer data that’s worth a bob or two to the right buyer.

The Australian market for airtravel is big and, unlike in Europe or US, it's likely to grow in the long run; so those gates might be worth something if they can keep hold of them for long enough.

Yep. Melbourne - Sydney (440mi) is the second/third (depending on whether you count passenger volume or aircraft movements) most trafficked route in the world behind a domestic Korean and domestic Japanese route (152 flights per day on average, 9.2 million passengers/year).


Perhaps some hitherto unforeseen competitive advantage in routes and flight paths? But even then, seems tough. If you thought middle seat on the last row of United was bad, can’t wait to see what this looks like when they’re done with it.

What makes you think creditors would keep helping Bain "load up [companies] with debt" if doing so yielded an intolerably high risk of default? It seems obvious that they'd run out of patsies, sooner or later.

Their assets are their name and the landing slots, plus a running airline. Landing slots have some intrinsic value. I expect to see a lot of airlines go bankrupt. We have too many for next year or two.

Well, if they are like the Batman supervillain, they just bought a fleet of flying bombs.

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.

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".)

Virgin won't get special treatment, but the Australian government, like all governments, will give the whole commercial aviation industry concessions and benefits to help keep it afloat, as it is of importance for economic and security reasons.

It's a different scenario to when Ansett went under, as back then the problem was isolated to Ansett, and the industry was still fundamentally strong (due in part to the entrance of Virgin, which at that stage was an up-and-coming low-cost carrier with solid backing from Branson and other early investors).

The AU government wasn't willing to bail VA out of insolvency, but now that a private buyer has come in to restructure it, it will be able to get the same benefits as Qantas.

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

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.

Rex has been talking about buying some bigger jets to try and grab market share while Virgin and Qantas are struggling.

Unlikely I’d say. The govt has not been forthcoming so far, and the company is mostly foreign owned anyway right?

Correct, until a couple of years ago, VA was pretty much owner by Air New Zealand, Singapore Airlines and Etihad each having about 22%. Richard Branson's Virgin Group had less than 10% and the rest was publicly held by mostly retail investors. Then Air NZ sold their shares to a Chinese consortium.

I think they have avoided any handouts to accelerate(Or at least not delay) a sale. Now that there is new ownership I expect they will come to the table.

Not to pass judgement on the wisdom of this strategy either way, but this decade's Liberal government hasn't been particularly open to saving/subsidising foreign owned businesses just because they maintain a national industry. Otherwise GM and Ford would still have factories here.

Why would a country need two domestic airlines? To keep one alive makes sense as a strategic asset. But two? Can just make the market more friendly to foreign airlines if more competition is needed/wanted.

Foreign competition is a problem because employees of the domestic company vote (the foreign company doesn't have a large back office of voters). Thus the domestic company can vote for things good for them bad for competition and bad for the country. Two companies means that the thing voted for is more likely to be fair because a number of good for one ideas are not possible with the other opposing it.

Note that many of the things good for the domestic company are bad for the country overall. However non employees are not individually harmed as much as employees are individually helped. Thus most voters won't oppose the bad regulations.

Has Australia not given any bailouts to the airlines yet?

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.

No, it's not really the kind of thing governments could do, as they can't really be independent; they're generally a major creditor (for unpaid taxes) along with all the others.

In Australia, independent administrator is appointed who is working on behalf of creditors. Government is usually another creditor so they are not exactly an independent party.

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.)


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.


Providing administration/liquidation services is a big industry. They come in to protect the interests of creditors and can usually be replaced by a vote of the creditors.

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...

This is a straight up political hit piece published in August 2012 a few months before the Presidential elections when Romney was a major party nominee.

"And the drama of this rhetorical high-wire act was ratcheted up even further when Romney chose his running mate, Rep. Paul Ryan of Wisconsin – like himself, a self-righteously anal, thin-lipped, Whitest Kids U Know penny pincher who’d be honored to tell Oliver Twist there’s no more soup left. By selecting Ryan, Romney, the hard-charging, chameleonic champion of a disgraced-yet-defiant Wall Street, officially succeeded in moving the battle lines in the 2012 presidential race."

The rhetoric and the journalism are hard to separate in this article.

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

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.

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

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.


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.

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

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 .

Yep, seems like the big expectation here is to retain jobs and keep a competitive market in Australian domestic travel. Doesn’t seem likely anymore, which is a shame, because I always liked flying Virgin over the cattle-mustering experience that was flying Jetstar.

Only thing I ever remembered was that they were founded by Mitt Romney which immediately reminds me of the "Corporations are people" quote.

Corporations definitely are people, just ones that have a legal duty and financial incentive to act extremely selfishly and deceptively.

That's a caricature. Company directors have a legal duty to act in the interests of the company (as distinct from shareholders), but that doesn't mean they have to "act extremely selfishly and deceptively", any more than individuals do or should.

People and companies need to balance their individual short term self-interest with their reputation and long-term interest.

Like individuals, some companies can act like assholes, but when the system works well, people will stop associating with those ones.

Of course, cronyism, monopoly effects and other issues mean the system doesn't always work well, but that's a somewhat separate matter.

Nice so I'm being downvoted by anti corporate and pro corporate people, good to know.

You compared the level of selfishness of corporations to individuals. I wonder if other people here would agree with that.

My original intent was to confirm that corporations are indeed made up of people, who have motivations.

Most people here would deny that corporations should be considered people.

> Most people here would deny that corporations should be considered people.

Most people understand the legal basis for that when it's explained. And most people understand that corporations are run by people and are built to benefit (some) people.

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