Rohit

On Thursday, Virgin Australia advised ASX, that the minority shareholder in Velocity Frequent Flyer Program, Affinity Equity Partners is exploring options to sell it’s entire shareholdings.

Who is Affinitty Equity Partners?

Affinity Equity Partners is a Hong Kong based Private Equity Group. In Oct 2014, it paid $335 million to purchase a 35% stake in the Velocity program. The remaining 65% is held by Virgin Australia.

Why is Affinity selling it’s shares?

The announcement does not say anything on this matter. However, Private Equity Groups are known to buy promising assets/businesses which in their view, are at an infancy and likely to create tremendous value in coming years. Sometimes they may also take-over businesses which are fundamentally sound, but for some reason are unable to run profitably and thus trading at distressed valuations.

The premise being, that by bringing in experience and expertise from outside, they can turn around the business, on-sell it to other investors and make a profit.

Who is likely to buy Affinity’s stake?

It depends on the mode of sale which is not yet known. Affinity may unload the shares to another private investor in an off-market deal. If it decides to go down that path, as per the terms of the 2014 agreement, Virgin Australia has the 1st Right of Refusal, meaning if they want, Virgin may chose to buy those shares off Affinity.

It is also possible that Virgin and Affinity may decide to sell the latter’s stake through a public float, have Velocity list on the Australian Stock Exchange and operate as a stand-alone business. If the float is able to attract a premium valuation, Virgin Australia may even be tempted to chuck some of it’s own shares in the kitty and mop-up some much needed cash to pay for the aircraft’s it has on order.

Could Virgin Australia be interested?

You can never tell for sure, but it’s highly unlikely. Since taking over in March, Virgin’s new CEO Paul Scurrah has made clear his intention to cut-out all wasteful expenditure and foster a culture of austerity.

This point was further buttressed, when in a clear departure from his predecessor John Borgetti’s policy of aggressive expansion, Scurrah deferred delivery of new planes scheduled to join Virgin Australia’s fleet in November this year. Those have now been pushed back by several years, thus offering him an opportunity to preserve cash and focus on turning around some of the loss making operations of the airline.

It’s quite clear that flights to Hong Kong are not yet viable, to make matters worse, since separating from Air New Zealand late last year, Virgin’s trans-tasman flights are hemorrhaging cash. I saw this first hand recently, on a flight to Christchurch, where the plane took off with barely 50 passengers onboard. In this environment, it’s hard to see Virgin wanting to part with precious cash on hand.

Should I be concerned? Are my points safe?

Relax, there is no reason for alarm. Your points are safe and you can continue to earn and redeem them as usual. A change in minority shareholding does not affect day to day running of the program. If it puts your mind at ease, Virgin Australia has reaffirmed it’s commitment to holding a controlling stake in the program, meaning regardless who the new part-owner/investor is, they will continue running the show.

So please don’t go around burning your valuable Velocity points willy nilly fearing the worse.

Toaster
Buying a toaster is NOT a good use of your Velocity points

In Conclusion

Virgin Australia launched Velocity in August 2011. Since then, it has proven to be a real money spinner, raking-in $110 million dollars in pre-tax earnings(EBIT) last year. Although Affinity’s exit creates some uncertainty in terms of the ownership structure, it’s comforting that Virgin will retain a majority stake.

For members of the Velocity Frequent Flyer program, these developments make no practical difference and it’s business as usual.

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