Virgin, Affinity prepare sale document for Velocity

[kyle]

The latest 'news' today is VA is set to buy back the 35% stake of VFF owned by Affinity Equity Partners.

VFF is valued at more than $1.7B according to the article below. A 35% stake would therefore be valued at more than $595M.

There has been no indication of where the money would be coming from to fund the purchase.

Link below (paywall) -

Virgin set to fly away with Velocity stake in $2b deal

Virgin Australia is set to buy back full control of its rewards program, Velocity Frequent Flyer.

www.afr.com

Or read here for free: Virgin talks over frequent flyer program

 

[HS-TQE]

Just In: VA entering a MOU to buy back the 35% of VFF from Affinity, with the transaction expected to be completed before the end of 2019. This will mean VA will have 100% control of VFF once again when the transaction is complete.

Money to fund the acquisition is rumoured to come from cash reserves, as none of the current airline shareholders are expected to help.

Virgin Australia to buy back full ownership of Velocity Frequent Flyer

Virgin will spend $700 million to buy back a 35% private equity stake in its Velocity loyalty scheme.

www.executivetraveller.com

 

[Must...Fly!]

That is a big old commitment of cash. It's the right move but whether it's the right move in the context of financials is the other question. They must be confident of other pending financial matters being sorted out.

 

[moa999]

Money to fund the acquisition is rumoured to come from cash reserves, as none of the current airline shareholders are expected to help.

Not sure about that.
FChe ASX release this morning

The Group confirms that it has entered into a term sheet with Affinity to buy back its 35% minority investment for $700 million. Completion of this transaction is subject to certain conditions, including the finalisation and execution of long form documentation, funding and the Group receiving Foreign Investment Review Board approval in respect of the acquisition

While they have a $1m+ cash balance much of that in an airline is restricted in some way, and I suspect the external lenders would prefer to be repaid in some respect.
I'm expecting some form of an equity raise, unsure how big, with at least one of the current airline shareholders supporting it.. I can only think this is what the FIRB approval is for (they shouldn't need FIRB to buy the Velocity stake I wouldn't think)

 

[Pleb Status]

Another quote from the AFR article -

"Even if you assume 100 per cent debt, we still believe they have the balance sheet capacity to do the buy back," S&P analyst Graeme Ferguson said in a phone interview. "Having full control over the business strategy is certainly a positive."

So some, in their opinion, believe VA could complete the purchase using debt alone.

Not a bad investment for AEP if completed. Buy for $335M, sell for $700M five years later and most (if not all) of the interest payments on the $335M debt used for the original purchase would have been covered by dividends from VFF over the period of ownership.

Link (paywall) -

Virgin confirms $700m Velocity stake deal

The airline will buy back the 35 per cent of its Velocity frequent flyer program owned by Affinity Equity Partners for $700m

www.afr.com

 

[moa999]

Not a bad investment for AEP if completed. Buy for $335M, sell for $700M five years later and most (if not all) of the interest payments on the $335M debt used for the original

Indeed.. wouldn't be surprised if AEPs original equity investment was only $50m, rest being debt funded.. could easily be a 10x return

 

[ozstamps]

Good move to own it wholly.

And VERY good for current members.

Money focused carpetbaggers would turn all status levels into revenue based in a year, as US carriers have done.

 

[moa999]

And VERY good for members

Not necessarily.. while it was separated they couldn't change much as any devaluation would possibly transfer value.
Once it's fully owned however.

 

[pauly7]

Not necessarily.. while it was separated they couldn't change much as any devaluation would possibly transfer value.
Once it's fully owned however.

Well strategically I think it’s a really good move.

Very interesting to see where they get the money... watch that space...

I understand your fear though.

 

[Must...Fly!]

Well strategically I think it’s a really good move.

Very interesting to see where they get the money... watch that space...

I understand your fear though.

I'd agree with both of you, It's better in the hands of VA than any other equity or private partners who have purely profit in mind.

VA can leverage growth in Velocity directly in to their airline business and not have to be (as) concerned with the immediate financial situation. But it does make it easier to control the value and price per point equation.

 

[jakeseven7]

I'd agree with both of you, It's better in the hands of VA than any other equity or private partners who have purely profit in mind.

VA can leverage growth in Velocity directly in to their airline business and not have to be (as) concerned with the immediate financial situation. But it does make it easier to control the value and price per point equation.

I think this is definitely the right move, My fear is though what are the potential implications of spending that enormous amount of money... Debt servicing if loans increase, cash decrease lessens the war chest against potential future losses and external shocks if they use cash. I would hope there wouldn't be any potential further impacts on more customer facing improvement projects like the flat J class for trans con 737's (on hold already - would this be pushed out more) and fleet replacement (deferred already would this be pushed out more) etc

 

[trippin_the_rift]

Another airline loyalty program that has a higher valuation than the airline.

When will the market start realising that the value of these companies is not within a 50-year old 'airline/rask/fuel/pilots/planes' business, but in the digital capacity to unlock new value for both passengers and the host airline.

My thoughts - including, how I believe this is the start of Virgin /VHA re-privatizing: Virgin Australia to buy back 35% stake in Velocity for $700M

 

[Pleb Status]

Another airline loyalty program that has a higher valuation than the airline.

When will the market start realising that the value of these companies is not within a 50-year old 'airline/rask/fuel/pilots/planes' business, but in the digital capacity to unlock new value for both passengers and the host airline.

My thoughts - including, how I believe this is the start of Virgin /VHA re-privatizing: Virgin Australia to buy back 35% stake in Velocity for $700M

A bit OT but some of your articles are quite interesting to read. Most of it is just common sense I would have assumed.

With respect to the customer retention and 'share of wallet' articles, if this sort of data analysis is being undertaken by the airlines I frequent, what they do with 'adverse' analysis results is a complete failure. So much so, I assume they do no customer retention and 'share of wallet' data analysis at all (certainly at an individual customer level).

If they undertake any analysis, they really only want to know the 'answer' if the data shows that the customer is happy and 'loyal' (95% of our 'current' customers are happy). If they are not, airlines which have limited competition (like in Australia for example) are very happy just to cut unhappy customers adrift and believe that sending a couple generic emails a week will increase their 'share of wallet'. No more effort is evident, from the customer perspective at least...

Management are not interested why a customer is unhappy because it is most likely a decision that they made which has alienated the customer. The same applies with the 'share of wallet'. Why give the board any reason not to pay your 'performance' bonus for the year (even if both revenue and profit dropped in the year).

Fare data analysis will certainly increase in the future, but only to determine the maximum the airline can gouge your customers before they leave....

 

[trippin_the_rift]

A bit OT but some of your articles are quite interesting to read. Most of it is just common sense I would have assumed.

SOME?!?!? ;-)

With respect to the customer retention and 'share of wallet' articles, if this sort of data analysis is being undertaken by the airlines I frequent, what they do with 'adverse' analysis results is a complete failure. So much so, I assume they do no customer retention and 'share of wallet' data analysis at all (certainly at an individual customer level).

If they undertake any analysis, they really only want to know the 'answer' if the data shows that the customer is happy and 'loyal' (95% of our 'current' customers are happy). If they are not, airlines which have limited competition (like in Australia for example) are very happy just to cut unhappy customers adrift and believe that sending a couple generic emails a week will increase their 'share of wallet'. No more effort is evident, from the customer perspective at least...

Management are not interested why a customer is unhappy because it is most likely a decision that they made which has alienated the customer. The same applies with the 'share of wallet'. Why give the board any reason not to pay your 'performance' bonus for the year (even if both revenue and profit dropped in the year).

Fare data analysis will certainly increase in the future, but only to determine the maximum the airline can gouge your customers before they leave....

Many years ago British Airways tried to create a 'Know-me' program that was a single customer view across the entire group.
God-mode for airline data.

Ultimately it never took off because it was expensive and nobody had connected the dots between God-mode and cost-saving/revenue-generating.

These days it's possible to measure things like how to interact with a specific passenger. Measuring that effectiveness and attribution of new revenue to soft actions taken at the front-line. It all sounds easy and common sense once explained - but getting from zero to the point of having a system being able to track all of this takes a lot of resources.

Not sure how deep QF and VA are into all that. They probably don't need to bother improving. Duopoly and all.

 

[eastwest101]

Another airline loyalty program that has a higher valuation than the airline.

When will the market start realising that the value of these companies is not within a 50-year old 'airline/rask/fuel/pilots/planes' business, but in the digital capacity to unlock new value for both passengers and the host airline.

My thoughts - including, how I believe this is the start of Virgin /VHA re-privatizing: Virgin Australia to buy back 35% stake in Velocity for $700M

Interesting article, if what you might be suggesting is that the market can't put a sensible valuation on an airline because the traditional valuation metrics of the airline business are being superseded by other metrics of the loyalty business e.g. selling points to other businesses. If that's the case and the market is "wrong" in its valuation of combined airline and loyalty businesses then logic would dictate that private ownership and or private equity will be the end result of this market valuation failure.

Or more simply, are VA and QF essentially profitable customer points and loyalty businesses who just happen to also operate less profitable airlines that fly people here and there at a loss (or slim profit margins) in order to drive the principle loyalty scheme with its highly profitable data mining/points creation and reselling ?

Of course we shouldn't get too carried away with this theory as the value of a loyalty scheme without a partner airline to interact with in earning and redeeming points is substantially less than one with an airline. The two are mutually beneficial and it makes sense to have their ownership and management aligned rather than diverging.

An airline without a loyalty scheme will be competing on price alone (and has to have the lowest cost base in the market to survive so will be locked into a race to the bottom forever) or can only survive in a monopoly without any viable competitors.

Regarding the amounts that Affinity paid for Velocity and what they are asking to be paid to sell their share of Velocity back to the parent airline, are you saying that they sold it off too cheap in 2014 or are Virgin paying too much in 2019 (providing the amounts discussed eventuate) ?

 

[HS-TQE]

Rumours at the moment say that VAH will use their cash reserves to fund the remainder of the Velocity buyback after securing a $620mill loan from American investors.

None of the current shareholders are involved in the funding of the buyback of Affinity's 35% stake.

Virgin Australia's takeover of Velocity Frequent Flyers has received a $US425 million ($623.3 million) boost from American investors.
Virgin will now look locally to obtain the remaining funds required for the acquisition of Affinity Equity Partner's 35 per cent stake in Velocity,

Paywall: Virgin Australia edges closer to $700m Velocity takeover

 

[jakeseven7]

Great more debtors and relationships to manage!