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Toll seeks to reduce Virgin stake

Virgin Blue's majority owner is evaluating options for boosting the carrier's value before selling some of its 62% stake

Virgin Blue's directors face the difficult task of finding ways to maximise the airline's value at a time when it faces costly initiatives and when capital markets have grown cautious.

The impetus to boost share value follows months of speculation over the intentions of majority owner, Toll Holdings. When the airline reported earnings in February, it explained: "Toll is working with Virgin Blue management and its board, together with advisors, to evaluate options to enhance shareholder value, which would likely see Toll reduce its ­investment in the company."

Toll bought control of Virgin Blue in 2006 when the airline's shares traded around A$2 ($1.80). They have since dropped by a third. Paul Little, Toll's chief executive, concedes part of the problem is that Toll's 62% stake in the airline restricts share liquidity.

Toll wants a higher price before it sells, so the challenge is how to find a way to boost share value. Cost cutting is not a strong option. Virgin Blue faces major initiatives this year, including the launch of V Australia to the USA, expanding Pacific Blue's New Zealand presence, and opening more routes as its fleet of regional jets grows. Brett Godfrey, Virgin Blue's chief executive, estimates that V Australia's startup costs on the US route alone will be A$70 million ($63 million), not counting the cost of aircraft, and the route will take 18 months to show a profit. The airline also warns that higher fuel costs and surplus domestic capacity could hurt results.

Earlier, Virgin Blue also proposed an ultra low-cost domestic carrier to compete with Tiger and Jetstar, but Godfrey now says he has "a couple of other priorities on the runway ahead of it".

Virgin's board is studying ways to boost value without cutting costs. Spinning off assets such as its loyalty plan is an option, but this faces its own hurdles. Qantas is also looking at spin-offs, but recently decided to delay most of them because capital markets have turned so cautious. Unless Branson's Virgin Group is willing to pay a premium for Virgin Blue shares, Toll's sale plans look problematic. The Virgin Group has a 25% stake in Virgin Blue.


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