Virgin Australia Will Likely Be Owned By U.S.-Based Investors As Bidding Nears Finish Line

The bidding for ownership of ailing Virgin Australia airlines has been narrowed down to two U.S. companies, Boston-based private investment firm Bain Capital and New York-based global investor Cyrus Capital Partners.

Virgin Australia’s administrator, the accounting firm Deloitte, led by Vaughan Strawbridge, spent the past two days interrogating the shortlisted parties about their offers for the struggling carrier. The original list of suitors numbered 20, including the government of the Australian province of Queensland, private equity firm BGH Capital of Australia and U.S. aviation investor Indigo Partners.

"Five non-binding indicative proposals were received on Friday, and they have now been further short-listed to two preferred bidders," Strawbridge said. "Both Bain Capital and Cyrus Capital Partners are well-funded, have deep aviation experience, and they see real value in the business [of Virgin Australia] and its future."

Strawbridge noted that the bidding created “competitive tension.”

"That is important in a process such as this, and we are in a strong place when it comes to delivering the best possible commercial outcome for all creditors, and to see a strong and sustainable Virgin Australia emerge from this process," he said.

Final bids for Virgin Australia, which went into voluntary administration in late April, are due on June 12. The sale of the airline is expected to be completed by the end of the month.

“We will now spend the coming weeks facilitating in-depth bidder engagement with the stakeholders of the business and work closely with both preferred bidders in the lead up to binding final offers being received,” Strawbridge said.

Virgin Australia currently owes about $7 billion to about 12,000 creditors. It grounded its fleet in March and temporarily laid off or furloughed most of its 10,000 employees.

Bain Capital, one of the world's top private investment firms, has about $105 billion in assets under management.

Jayne Hrdlicka, the former chief executive of Jetstar, a low-cost Australian airline and subsidiary of Qantas, previously worked at Bain's consulting division. In the event Bain successfully wins the bidding, she could conceivably become Virgin Australia's new CEO, supplanting Paul Scurrah.

Cyrus Capital, established by Stephen Freidheim in 1999, manages about $4 billion in global investments.

Freidheim has served on the board of Virgin founder Richard Branson’s Virgin America airline. In fact, Cyrus Capital was one of the first financial backers of Virgin America.

Canadian investor Brookfield Asset Management, which has $515 billion of assets under management, withdrew from the bidding, reportedly over worries that Virgin Australia could soon run out of cash. However, Brookfield later filed a detailed bidding proposal to Deloitte on Friday. This raises the possibility that bidders who earlier dropped out or were rejected might form partnerships with the winning bidder.

"There will also be speculation that entities associated with the parties that have not moved into this next phase, as well as others, could become involved in some capacity with the remaining parties," Strawbridge said. "That will, of course, be a matter for them."

The Guardian newspaper wrote that Cyrus Capital “is likely to be a more attractive option to unions [than Bain] because it has committed to making sure the Australian airline remains a full-service airline.” Bain, on the other hand, has been widely criticized by unions for laying off workers after acquitting a new business.

Meanwhile, unions representing aviation workers in Australia have urged the buyer of the airline to protect $450 million in worker entitlements in full.

While some aviation analysts have speculated that the new owners will likely reduce Virgin Australia's fleet and cancel some unprofitable routes, Michael Kaine, the national secretary of the Transport Workers Union pointed out that the short-listed bidders were "committing serious capital to the airline" and sought to re-establish Virgin Australia a full-service airline.

"It is now up to the final bidders to show they can follow through on their commitment to ensure the best outcome for the Australian community and Virgin Australia workers," Kaine said.

But Michele O'Neil, president of the Australian Council of Trade Unions, or ACTU, was concerned that both Cyrus Capital Partners and Bain Capital have "checkered histories with regards to workers' rights and industrial relations.”

"We will continue to be vigilant in exercising our due diligence and subjecting bidders to proper scrutiny and oversight," she said. "Any successful bid must maximize the number of permanent and full-time jobs at Virgin Australia, and protect as many jobs as practically possible."

O'Neil added that 100% of all worker entitlements must be paid and protected.

"And any successful bid must secure a viable future for Virgin Australia, and for our aviation industry," she added.

Unions will meet with administrators on Wednesday to commence talks with the two shortlisted bidders.

Kaine also criticized the Australian government for failing to offer more funding and regulatory support to support Virgin Australia's future, citing Canberra "continues to jeopardize a successful outcome by staying a silent and passive observer.”

Virgin Australia's current chief executive Scurrah, had been requesting a $1.4 billion loan from the government, but Treasurer Josh Frydenberg and other ministers have said the government will not "bail out" Virgin Australia. However, in March, the government unveiled financial relief package for airlines – under this scheme Virgin Australia received $25 million in assistance, while Qantas was given $37 million.

"The federal government is directionless on aviation and workers across the sector are bitterly disappointed as they know their jobs are under threat," Kaine said. "Other governments around the world are stepping in and supporting their aviation industries."

Shadow transport minister Catherine King also criticized the government for failing to save Virgin Australia.

"Over recent days we have heard reports that administrators, bidders and unions all hold real concerns regarding the ability of the airline to survive through administration without guarantees regarding government support,” King said on Monday. "The government must immediately outline the level of support it is prepared to offer in order to secure the future of the… workers who depend on Virgin Australia and the ongoing viability of Australia's second major airline."

Kaine added his union “remains focused on bidders willing to engage constructively with the workforce and its representatives, which are planning to get the fullest possible Virgin Australia back in the sky and which have a strong commitment to staying with the asset for the long term.”

The winning bidder will also have to reach some kind of agreement with aircraft leasing companies, financiers and bondholders – who are also owed billions of dollars, but will likely be compelled to accept lower amounts of cash to keep the airline going.

Elizabeth Knight, business columnist at the Sydney Morning Herald, commented that Australia’s second biggest airline will eventually be owned by Americans.

“Cyrus and Bain both have extensive experience in aviation and they have significant resources,” she wrote. “Bain has been less than clear about where it would like to [place] Virgin Australia in the market -- in the event it is the ultimate winner. However, Bain’s declaration that it wants to ‘make flying fun again’ suggests a focus on the leisure market.”

Knight added: “The challenge for both shortlisted candidates is to navigate the industrial relations issues before them. Given the largest group of creditors by number are Virgin Australia’s employees, the bidders will need to convince staff that most will be retained and wages and conditions won’t deteriorate.”