Virgin Australia's three major foreign shareholders will tighten their grip on the airline after backing a $350 million capital raising to help bolster its finances in the midst of a bitter battle with Qantas.
In return for them digging deeper into their pockets, Virgin will offer Singapore Airlines, Air New Zealand and Etihad each a board seat, which will boost the number of directors to 10.
The three airlines will inject as much as $316 million into Virgin via the entitlement offer, which will boost their combined stake from almost 63 per cent to as much as 70 per cent. Their final holdings will depend on interest from other mostly retail shareholders.
Richard Branson's Virgin Group will shell out $35 million to keep its stake at 10 per cent.
A likely increase in the holdings of the big three shareholders gives weight to speculation they will eventually take Virgin private without having to pay a takeover premium. They are nearing a combined stake that would allow them to compulsorily acquire minority shareholders.
"They are getting closer and closer to collectively owning it," Commonwealth Bank analyst Matt Crowe said.
Under the terms of the raising, Australia's second-largest airline will offer existing shareholders five new shares for every 14 they own at 38¢ each.
Virgin will use the $350 million raised to reduce its net debt and for "general corporate expenses", in an industry renowned for burning through cash. Virgin chief executive John Borghetti said the extra cash would ensure the airline was in a "much stronger" position, helping it to withstand shocks and put its balance-sheet metrics on a similar footing to global peers.
"This shows a huge commitment from our major shareholders," he said. The airline has not given earnings guidance for this financial year, although Mr Borghetti said recent trading conditions were "certainly not as bad" as at the beginning of this year.
Virgin is engaged in an intense battle with Qantas for passengers in the domestic market.
Mr Borghetti rejected suggestions it had resorted to a capital raising because of the conditions, insisting it was "about strengthening the balance sheet".
He acknowledged that speculation about the three major shareholders pursuing privatisation would remain.
"I don't think it dispels it but I don't think it confirms it either," he said. "Anything can happen by whatever scenario you dream up.
"This industry is so unpredictable."
The capital raising comes just a month after the airline issued $US733 million in bonds in the US, which were secured against 24 planes it had bought between 2003 and 2011. The airline also raised about $25 million from the sale and leaseback of a hangar at Brisbane Airport in June.
Virgin's three largest shareholders provided a $100 million one-year unsecured loan in August after the airline slumped to a $98 million annual loss. However, that loan will be terminated in the wake of the rights issue.
Goldman Sachs analysts said competition in the domestic market should "remain rational for at least the next few months after Virgin reiterated its plans for growth in domestic capacity. The key question will be to what extent Virgin's strengthened balance sheet will allow it to compete more aggressively with Qantas in the domestic market."