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Bidders line up as Virgin clears the debt

In addition, a note in early April from UBS to its clients on potential acquisition for the cashed-up Wesfarmers, the investment bank nominated Qantas as a possible target. Wesfarmers has raised more than $2 billion over the past couple of months by selling some of its shareholding in Coles, placing it in a prime position to entertain opportunistic acquisitions.

From the private equity sector, BGH Capital appears to be the frontrunner but Bain Capital and Oaktree have also been mentioned. And of course Virgin Australia co-founder Richard Branson is busy in the background trying to ensure he has some part to play in the airline’s recapitalisation. He needs to protect his brand and the $15 million a year the airline pays to use it.

Interest from these players alone demonstrates how small and interconnected is the Australian market. Macquarie partnered with private equity group TPG to mount an ultimately unsuccessful $11 billion offer to privatise Qantas back in 2006. Ben Gray was managing director at the time and has since founded BGH alongside Robin Bishop, the former head of Macquarie Capital. Bishop missed out on the top job at Macquarie after the retirement of Nicholas Moore.

Moore was on Tuesday appointed by the federal government as it emissary to engage with the administrator on the sale of Virgin. (It is not clear what role Moore will play. Perhaps to ensure Virgin is not sold to unsuitable interests or to a player that wants to break it up and sell it for scrap.)

Budget airline group Arizona-based Indigo Partners is another speculated to have registered interest but is considered a very outside chance. And contrary to some recent speculation there are no Chinese airlines on the list.

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Neither Deloitte nor Virgin would comment on which parties had registered an interest. However, Strawbridge said Deloitte was entertaining interest from more than 10 parties – although according to insiders this number has swollen closer to 20 as new expressions of interest came through on Monday night. Although a portion will be tyre kickers, the level of confidence displayed by Strawbridge about finding a suitable bid was unusually high for day one of corporate administration.

During Tuesday morning’s media briefing Strawbridge referred to the elevated level of competitive tension, the scope and scale of the expressions of interest and the “sophistication” of interested parties. It won’t be a protracted process, according to Strawbridge, who plans to have an information memorandum distributed to potential buyers next week.

Virgin, which has $5 billion in debt of which about $2 billion is junk bonds, was looking for a $1.4 billion loan from the federal government which could have been convertible into equity. Using back of the envelope calculations, if bondholders take a haircut (actually a full shave) and shareholders’ equity was completely torched, the proceeds of any acquisition money could be applied to debt.

Assuming a $1.4 billion offer, the airline would have a workable balance sheet at the end of the process. The future plans would also involve a rethink of capital expenditure including the acquisition of new aircraft and the abandonment of non-profitable routes and international operations.

If so Virgin could be pared back to a profitable domestic duopoly. And its chief executive Paul Scurrah’s prediction on Monday could prove correct. “It’s a tough day for our airline but certainly not the end. We are not collapsing.”

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