Space or bust: Richard Branson’s Virgin dilemma
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Richard Branson built the Virgin brand on his love of sailing close to the wind, boasting in one of his books of 76 near-death experiences, from hot air balloon crashes to dodging a cascade of boulders on Mont Blanc.
The business escapades of Britain’s best known billionaire have often been as exhilarating as the stunts used to promote them, launched with little capital — or, at least, little capital provided by Sir Richard.
Now, as a pandemic grounds planes, empties hotels and gyms, and paints cruise ships as floating deathtraps, the question is whether a 70,000-person empire exposed to each of those industries faces its own brush with disaster in the year its showman founder had hoped to spend celebrating its 50th anniversary.
Already, two of its most high profile businesses are in critical condition. Virgin Atlantic, the airline he launched in 1984 to shake up an industry of staid flag carriers, announced more than 3,000 job cuts this week and has asked the UK government for £500m of support — so far to no avail.
Absent a change of heart by the UK Treasury, Sir Richard risks losing his 51 per cent equity stake in Virgin Atlantic even if it flies again. Virgin Australia, of which his group owns 10 per cent, has already collapsed into voluntary administration.
As critics asked why an island-dwelling billionaire needs a bailout, Sir Richard said he was more cash-strapped than they thought. His net worth (estimated by Forbes at $4.5bn and by Bloomberg at $4.9bn) was tied up in Virgin’s businesses, “not sitting in a bank account ready to withdraw”, he explained.
“The challenge right now is that there is no money coming in and lots going out,” he lamented, suggesting that he would have to mortgage his home on Necker in the British Virgin Islands. He has not done so, it turns out: instead, he diverted a bank loan that he took out before the crisis to expand his luxury resorts.
Britain’s least publicity-shy businessman has a famously opaque corporate empire. Virgin Group is the ultimate holding company but beneath that are scores of enterprises owned by different holding companies registered in low-tax jurisdictions that require minimal disclosure.
An FT analysis confirms that cash has all but stopped coming into several operations that had been seen as the most promising. Sir Richard’s nascent cruise ship and hotel ventures in the US have been hit. Virgin Active gyms are closed until further notice, and the value of a stake in lossmaking Virgin Money has collapsed to just £140m, a quarter of its value when it agreed to merge with the Clydesdale Bank two years ago.
But the company is also less strapped for cash than it has often been in the past. It financed its new US projects with the roughly $1bn proceeds from selling its Virgin America airline to Alaska Air in 2016, and it has deep-pocketed partners such as Bain Capital and GIC in Virgin Voyages, the cruise company whose first ship had just been delivered to Miami when the virus struck.
But the biggest recent boost came from the thrill-seeking billionaire’s interest in space travel.
He claims to have poured more than $1bn into two space businesses: Virgin Galactic, a “space tourism” venture that has signed up would-be astronauts including Justin Bieber, and Virgin Orbit, which has yet to make meaningful revenues but which plans to launch small satellites from converted 747 jets for government and commercial customers.
Sir Richard recouped some of that cash when Virgin Galactic listed last year in New York. Even though it has lost almost $500m over the past three years, his roughly 44 per cent stake is now worth about $1.8bn, making it by far his largest asset, despite sharp swings in the stock.
Conditions attached to the listing prevented Virgin from cashing in more of its shares immediately, but a little-noticed registration statement filed last Friday cleared the path for it to sell up to half its holding, which is worth more than $900m at current prices.
Selling one asset to shore up another would reflect Sir Richard’s history. In 1992, the entrepreneur who dropped out of school aged 16 to launch a student magazine and sell albums by mail, traded Virgin Records to fund Virgin Atlantic’s long and acrimonious libel battle with British Airways. A decade later, after the 9/11 attacks grounded airlines, he sold hotels to raise cash.
Virgin Group is part family office and part private equity firm. He long ago handed management to a chief executive: Virgin’s former general counsel Josh Bayliss, who has been in the role since 2011, has focused on diversification and profitability.
Mr Bayliss organised the group’s investments into four categories: the largest is branded private equity, covering its most high-profile brands. The next two divisions — each worth more than £100m — are unbranded private equity (a portfolio of non-consumer businesses such as a renewable energy company) and venture capital investments in tech companies including Pinterest, Slack, Square and Twitter. Then there are hundreds of millions of dollars worth of properties and investment grade bonds.
Those last two categories, plus the deferral of planned investments, provided much of the $250m which Sir Richard pledged to provide his two airlines with when the crisis hit.
The transatlantic airline is Virgin Group’s most pressing problem. Delta Air Lines, its 49 per cent shareholder, has said it cannot inject more capital, although it may provide support in another way by not agitating for rapid repayment of $200m Virgin Atlantic owes it.
The formerly-trailblazing carrier has struggled to be profitable, only once exceeding the £105m in annual pre-tax profits it made in 1999. In the following 19 years of operation, the group recorded cumulative pre-tax losses of £91m, on revenues of £37.6bn.
The Delta joint venture, struck in 2012, helped it return to profit in 2015 after three years of losses, but this was shortlived. Virgin Atlantic lost money again in 2017 and 2018, two of the most profitable years in the industry’s history, said Andrew Lobbenberg, an aviation analyst at HSBC.
“They are cherry picking the best routes in the richest long haul business travel market in the world. How can that not work?” he asked.
The airline is far smaller than rivals, and maintains five different aircraft types in a fleet of just 42, yet many wonder what else held it back. “They’ve had a privileged position with their Heathrow slots,” said John Strickland, an aviation consultant. “The market on a route like [London to] New York is so big for point-to-point business travellers it’s very hard to fathom why they haven’t made money.”
Virgin Atlantic hoped to return to profit by the end of 2020, but after this week’s cuts to its workforce and fleet it now says it could take up to three years for demand to return to pre-crisis levels.
Its record of losses complicates Sir Richard’s task: to attract enough new investment to prove Virgin Atlantic has a medium-term business plan that merits government support. It already mortgaged its best asset, borrowing £220m against its Heathrow landing slots in a 2015 deal that was admired at the time for its innovative structure.
Virgin Group weathered the airline’s unprofitable years before, and the loss of £300m — the value of its Virgin Atlantic stake based on Delta’s assessment of its worth — would be a modest dent in Sir Richard’s fortune.
The more existential risk is that problems at the airline damage the credibility of the Virgin brand.
Royalties for using the brand are paid by businesses ranging from the airlines to gyms to the UK broadband provider Virgin Media and roll in at a rate of £90m-£100m a year.
That figure will drop considerably this year as the parent company delays or waives royalty charges for parts of the group that are struggling. The loss of its Upper Class Virgin Atlantic travel brand would be a further blow at the very moment when Virgin Mobile is set to merge with O2, posing the risk that this too will disappear.
Then there is the US expansion Sir Richard had hoped would mark Virgin’s anniversary. Virgin Atlantic has been vital for promoting his ventures in the US — the hotels, trains, cruises and space trips, as well as an as-yet unrealised plan to launch Virgin Money US. Already, the crisis is understood to have prompted Virgin Group to delay two major new projects.
When Sir Richard wrote that Virgin Group had found $250m to help its most troubled investments, he said that sum was “likely just the start”. The group is in discussions with scores of potential investors, hoping to find fresh capital for Virgin Atlantic and Virgin Australia much as Sir Richard has found wealthy individuals, private equity firms and sovereign wealth funds to finance his other ventures. Even if it were to lose its equity in both, it hopes that new owners would pay to keep using the Virgin name.
But Sir Richard did not come through the last crisis without having to sell assets, and this time again he faces a decision. The much-delayed Virgin Galactic, which a few years ago looked like an accident-prone folly, has still not started sending passengers to the edge of space, but for now its valuation has escaped the gravitational pull that coronavirus has exerted on most of his other businesses.
As he faces the nightmare prospect of losing control of his brand’s flag carrier, Virgin Atlantic, the question now is whether Sir Richard is prepared to cash in on his long-held space dream.