Singapore's swoop hits an Etihad sore spot

Sometime today, one suspects, Etihad’s James Hogan will place a call to Richard Branson inquiring about the availability of his Virgin Group’s remaining 12.4 per cent shareholding in Virgin Australia.

Both Etihad and Singapore Airlines are said to have talked to Branson about buying a slice of his original 22.4 per cent shareholding in Virgin Australia and today Singapore Airlines gained the first-mover’s advantage, lifting its stake (subject to Foreign Investment Review Board approval) from 10 per cent to 19.9 per cent.

That’s unlikely to please Hogan, who until Virgin Australia announced its plans to acquire a majority interest in Tiger Airways’ Australian operations last year – a deal cleared by the Australian Competition and Consumer Commission only yesterday – had his own designs on Virgin Australia as part of his global strategy of securing alliances with other carriers, and his influence over them, with equity holdings.

As part of the Tiger deal Virgin placed 10 per cent of its capital with Singapore Airlines. Singapore Airlines is the dominant shareholder in the Singapore-based parent of the Australian Tiger entity, which will retain a 40 per cent interest in the Australian business, so the increase in its Virgin Australia shareholding will buttress its partnership relationship with Virgin Australia.

Given that Hogan was said to be unhappy with the original entry of Singapore Airlines to the Virgin Australia register and the earlier 2011 unveiling of its own alliance with the Australian carrier he is likely to be even less pleased today.

Air New Zealand, another Virgin Australia ally, has a stake of just under 18 per cent in Virgin, a shareholding it raced to when Etihad’s interest in the carrier first surfaced. The Virgin Australia register is now crowded with strategic shareholders with their own interests and ambitions to protect.

Virgin Australia’s John Borghetti would have been surprised at the timing of Singapore Airlines’ move, but probably not by the fact of the move.

While Virgin Australia apparently wasn’t given any warning that Branson was about to sell a big slice of his shareholding to the Singapore-based carrier, Borghetti would have been well aware that both Singapore Airlines and Etihad had been talking to Branson.

Now that Singapore Airlines has secured as much of the Branson stake as it can without having to launch a takeover offer, and Branson has finally demonstrated that he is a seller of his Virgin Australia shareholding, Hogan will have to ponder whether matching the Singapore Airlines stake would actually deliver him any strategic benefit, given the other strands to Virgin Australia’s relationship with Singapore Airlines.

Singapore Airlines spent $105 million to take up its original 10 per cent stake in Virgin Australia. It spent another $5.3 million earlier this week when Virgin Australia placed 12.5 million shares to it to offset the dilution caused by the Australian group’s acquisition of SkyWest Airlines. It has now spent a further $122.6 million to lift its holdings to 19.9 per cent. The $233 million or so it has invested in Virgin Australia is an indication of its commitment to gaining an exposure to the Australian domestic market.

As I discussed yesterday (A crouching Tiger on Qantas turf, April 23) Singapore Airlines has long harboured a desire to get a foothold in this market. An attempt to do so by acquiring News Corp’s 50 per cent interest in Ansett in 2000 was frustrated by Air New Zealand (which had the same aspiration) exercising its pre-emptive rights.

The launch of the Tiger brand was a more recent attempt, but after more than $100 million of losses it would have been a very costly failure had control of the business not been sold to Virgin Australia. The enlarged shareholding in Virgin Australia and the continuing minority interest in the Tiger brand in this market give Singapore a much more viable exposure to the Australian domestic market.

Singapore Inc companies, concerned by the small (just over 5 million) population base of their own home market, see the Australian market as a large and stable base from which to anchor their regional ambitions, with SingTel’s Optus ownership the most visible out-working of that strategy of thinking. Australia is Singapore Airlines’ second-largest market.

It is a bonus from Singapore Airlines’ point of view that its bulked-up interests in Virgin Australia and its operations should enable Virgin Australia to be a stronger competitor to its own largest regional rival, Qantas, within the domestic market that is the foundation of Qantas’ financial stability.

For Richard Branson, who gave Brett Godfrey $11 million of seed capital to launch Virgin Blue in 2000, the $122.6 million Singapore Airlines paid implies a value of about $160 million for his remaining shares.

Having already pocketed hundreds of millions of dollars back in the first half of the last decade when Patrick Corp bought into the airline, the sortie into the Australian market has been an exceptionally profitable one for the dynamic UK entrepreneur.