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Air New Zealand sale could mean big payday for Virgin Australia's John Borghetti

by April 17, 2016 General
Air New Zealand last month said it would look to sell all or part of its 25.9 per cent stake in Virgin.


Air New Zealand last month said it would look to sell all or part of its 25.9 per cent stake in Virgin.

Air New Zealand’s failed attempt to oust Virgin Australia chief executive John Borghetti could have the ironic result of the airline boss receiving a payout of around A$8 million (NZ$8.8m) if Singapore Airlines makes a successful takeover bid.

Air New Zealand last month said it would look to sell all or part of its 25.9 per cent stake in Virgin after the decision by the Kiwi carrier’s boss, Christopher Luxon, to resign from the board.

Luxon did so after failing to receive support to replace Borghetti from other directors, including chairman Elizabeth Bryan and representatives of Singapore Airlines, Etihad Airways and Sir Richard Branson’s Virgin Group.

John Borghetti's Borghetti's shares and option rights would be sold if the company was delisted.


John Borghetti’s Borghetti’s shares and option rights would be sold if the company was delisted.

Singapore Airlines is viewed by aviation industry experts as the most likely party to make a full takeover offer for Virgin given its long-standing strategic interest in the Australian market, its strong balance sheet and desire to ensure a Chinese rival doesn’t join the Virgin register.

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Singapore Airlines also has a solid starting point of a 23.11 per cent stake that could be raised through on market purchases to 25.9 per cent before making a bid.

The near $8 million payout figure for Borghetti, based on Virgin’s closing share price of 35.5¢ on Friday, could be even higher if Singapore Airlines is forced to pay a premium to gain acceptances from other shareholders.

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However, it might be lower if Borghetti remained as the chief executive following the takeover because the board would have the discretion to decide against paying out all of his cash-settled short- and long-term incentives.

Borghetti’s shares and option rights, worth $3.9 million at current prices, would be sold if the company was delisted. In the 2014-15 year, he received total remuneration of $3.64 million.

Virgin shares have fallen by 5.3 per cent since Air New Zealand announced the potential sale of its stake, while the Kiwi carrier’s shares have risen by 5.1 per cent. Since Borghetti’s appointment in May 2010, Virgin shares have fallen by 27.6 per cent while shares in rival Qantas have risen by 60.5 per cent.

Other options for Air New Zealand could include selling an initial 19.9 per cent stake in Virgin to another airline. US-based Delta Air Lines and United Airlines and Chinese carriers like China Southern and Air China have been viewed as potential buyers.

Delta, a joint venture partner of Virgin on the trans-Pacific route, already has stakes in other global airlines, including Virgin Atlantic, Aeromexico, China Eastern and Brazil’s Gol.

In a briefing with analysts on Thursday, Delta chief executive Ed Bastian said: “We see the international marketplace as the source of long-term profitable growth opportunities. Our goal is to be the best US global airline.”

He did not comment specifically on the prospect of buying a stake in the Australian carrier.

Earlier last week, a Delta spokeswoman said the US carrier was not considering the purchase of a stake in Virgin but did not rule out buying shares in the future.

Holders of Virgin’s US dollar high-yield bonds are keeping a close watch on the potential for a change in the Australian carrier’s share register. Singapore Airlines, unlike Virgin, has an investment grade credit rating. 

The Virgin bonds contain a change of control clause requiring the new owner to repurchase the securities at a price equal to 101 per cent of the principal plus accrued and unpaid interest.

However, that clause excludes a change of control involving Singapore Airlines, Etihad Airways or Air New Zealand taking control of Virgin.

That means there would be no requirement for Singapore Airlines to repurchase the bonds immediately in the event of a takeover.

A bond prospectus from 2014 also warned if an existing shareholder took majority control of Virgin, it could require the airline to unwind a number of strategic alliances or amend or terminate material contracts relating to its business operations.

 – Sydney Morning Herald