Virgin seeks help | The Economist

NOTO OTHER BUSINESS The figure holds a candle to Sir Richard Branson when it comes to public relations stunts. However, not all of the British entrepreneur’s hugs go without a hitch: he was rescued once by a RAF helicopter when his speedboat capsized while attempting a record-breaking Atlantic crossing. Its track record in doing business with its branded empire Virgin is also fraught with successes and failures, including Virgin Cola, Virgin Brides (an attempt to disrupt the wedding industry) and Virgin Cars (a short-lived online retailer). . Through thick and thin, the bearded mogul scrambled, armed with a high profile mark and a permanent cheesy smile. At the end of 2019, his empire was valued at over £ 4 billion ($ 5.1 billion)

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This, however, was before covid-19. The Virgin Group has been heavily exposed to shutdowns caused by viruses: its activities include two airlines, hotels, gyms and a cruise line. (Other interests include banking, mobile and broadband networks, and space tourism.) In March, Sir Richard – who owns Virgin – said its travel, leisure and wellness businesses being faced “a massive battle to survive and save jobs”.

His carefully crafted image as a lovable outsider in the corporate world took a hit. Critics shouted hypocrisy when Virgin Atlantic (Virginia), a long-haul airline, has asked the UK government for a bailout; Sir Richard had said a decade earlier when his rival BA posted a record loss, meaning that weak companies should be allowed to die. They also noted that a bailout for a tax exile could be a bit rich. Sir Richard and the group’s parent company are both domiciled in the tax and disclosure light British Virgin Islands. (Virgin says he moved there for lifestyle reasons, no taxes, and the major operating companies pay taxes in Britain.)

The government’s rejection of a bailout forced managers to develop a plan to consolidate Virginia. The shareholders (Virgin, with 51%, and Delta, an American airline, with 49%) will defer the taking of fees, such as royalties; private investors are courted for loans; the airline hopes to renegotiate aircraft leases. It cuts 3,150 jobs and closes hubs in Gatwick and Newark, New Jersey; and he’s back in talks about a government loan, or a guarantee that would prompt credit card companies to release frozen reservation payments. A spokesperson says Virginia “Stay in a stable position”.

Virgin is also looking to revive Virgin Australia, the country’s second-largest airline until it takes office in April, rendering Virgin’s 10% stake worthless. Two private equity firms are sniffing. Final offers must be submitted no later than June 22. Virgin can co-invest in a recapitalization. Neither company was in poor health even before covid-19. Virginia lost £ 26million in 2018, the last year he filed for accounts. He hired a restructuring firm to work on options, including a contingency plan for a “prepackaged” bankruptcy.

A company that hopes to operate at a higher altitude may serve as a savior: Sir Richard’s space tourism business, Virgin Galactic, which launched in New York City last year. In recent weeks, a Branson check BVI The company, Vieco 10, sold 37.5 million Galactic shares, raising $ 560 million, but reducing the tycoon’s stake from more than 50% to around 30%.

The product will be used throughout the Virgin Group to cushion the blow of the pandemic. They exceed the $ 360 million in additional cash that Virgin executives, led by Josh Bayliss, believe will be needed over the next year to ensure all companies can continue to negotiate. But that estimate has already been increased once, and the group recognizes that more will be needed for 2021-2022. Additionally, Sir Richard may be reluctant to further reduce his stake in Galactic. The activity, currently valued at $ 3.4 billion, is still widely seen as promising, although it is plagued with delays. Some 600 potential space travelers paid $ 80 million in deposits.

Covid could have come at a better time for Virgin. Had he struck right after the sale of Virgin America, another airline, to Alaska Air Group in 2016, the group would have spent more than £ 800million. Instead, it came “deep into the investment cycle,” Mr. Bayliss says. Virgin doesn’t tend to stick with sales gains for long, thanks to its owner’s relentless desire to keep trying new things.

Some of these fledgling companies looked brilliant before Covid, but are now struggling. The first ship of cruise line Virgin Voyages, a joint venture with Bain Capital, is off the coast of Florida, hijacked there on its way to a launch event in New York City when the virus hit. The price of this ship and three others under construction is 3 billion euros ($ 3.4 billion). Virgin says the fleet has sufficient funding and now hopes to launch in October.

The new hotel business, with properties open or planned in several US cities, was also crushed. Of the three already operational, only Chicago is currently accepting reservations. Some of Virgin’s older businesses are also in severe pain. Virgin Active, which operates 238 gyms in eight countries, was shut down in March. The sites are reopening, but the need for social distancing will limit their attractiveness.

Despite these tribulations, Mr. Bayliss is convinced that Virgin will be able to weather the storm. There are no plans to change the business model, which essentially consists of running Virgin as a family office for Sir Richard, with two main parties: Virgin Group Holdings, which creates activities, brings in partners and then partially divests itself. or totally; and a licensing firm, which extracts royalties from Virgin-branded companies, often long after Sir Richard has sold out. Some 35 companies around the world pay to use its brand; Virgin owns equity in less than half of them. Royalty income for 2018 was £ 94.3million, a third more than four years earlier.

The future, according to Mr. Bayliss, is to “reverse” the old Virgin method, which places the participations above the income of the brand. Royalties, he says, provide “regular and recurring liquidity, like an annuity,” while the returns from an investment only in assets may be “more lump-sum.” “The value of the brand is greater and more lasting than the value of the investment capital itself,” he says.

It remains to be seen what the value of this brand will be once the crisis has subsided. By then, one or two valuable assets may need to be sold. It would not be the first time. Sir Richard has a history of sacrificing business to keep the empire afloat. In 1992, after a vicious fight with BA, he was forced to get rid of his beloved Virgin Records – the label behind bands ranging from the Sex Pistols to Simple Minds. He later admitted to crying when the sale closed.

Editor’s Note: Some of our covid-19 coverage is free for readers of The economist today, our daily newsletter. For more stories and our pandemic tracker, check out our coronavirus hub

This article appeared in the Business section of the print edition under the headline “Still smiling, Captain?”


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