SIA’s free lunch with Branson proved costly

July 11, 2007
Singapore Democrats

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Alistair Osborne
The Telegraph
10 Jul 07
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/07/10/cnvirgin110.xml

It will go down as the cheapest lunch Sir Richard Branson ever bought.

It was December 1999. The Virgin king was strapped for cash and facing daily rumours that, this time, his empire really was in trouble.

Showing typical chutzpah, the man who made his fortune in rock’n’roll had lured Singapore Airlines to London’s Four Seasons Hotel to discuss Madonna – not the pop star, but the codename for a deal.

He had offered the Singaporeans 49pc of his airline Virgin Atlantic, but the two sides were miles apart on price. Sir Richard had told the Asian carrier’s then chief executive, Cheong Choong Kong, that his airline was worth 1.4 bn. Mr Cheong valued it at 950m. That put the gap between them for the minority stake at a wide 225m. Negotiations had stalled and the two sides had retreated to separate rooms.

Both broke for lunch at the same time. Sir Richard spotted Mr Cheong’s entourage across the other side of the hotel restaurant, scribbled a note and strode across the room to give it to him. It said: “Let’s split the difference and I’ll pay for lunch.”

Three-quarters of an hour later, a grinning Mr Cheong passed Branson’s table, saying enigmatically: “I’m still smiling.” A few hours later the pair had agreed a 600m deal.

No prizes for guessing who’s been smiling since. And it is not Mr Cheong or his successor Chew Choon Seng.

Sir Richard put 100m of the proceeds into Virgin Atlantic and used the rest to fund, among other things, Virgin Mobile, since adding another billion or so to his fortune. Back in 1999, he admitted he had been considering floating the airline to raise cash, but: “If we had floated now, we would have got a lesser price. “

By contrast, it is unclear what Singapore Airlines has got out of the deal. Having paid an eye-watering price, the Asian carrier has since had to withstand the aviation downturn sparked by 9/11 and Sars. There have been commercial tie-ups – codeshares between the UK and Singapore and on Virgin routes from Heathrow to America – but nothing that justifies a ?00m investment. Dividend income has been negligible.

Says one banker, who has advised on many aviation deals. “Singapore Airlines paid a big price and got nothing out of this deal. They failed to embed the operational side of the deal.”

It’s no surprise then that Singapore Airlines is now considering selling its stake. But finding a buyer is another thing entirely, says Gert Zonneveld, an analyst at Panmure Gordon. “Who’s going to buy it? Why would you spend so much on a stake where you don’t have control?”

While earnings recovered in Virgin Atlantic’s latest full year, with pre-tax profits rising from ?7m to ?6.6m on turnover up from 1.34bn to 1.59bn, Singapore still looks to have overpaid.

Says one airline chief: “They’ll do extremely well to get their money back.”

Singapore Airlines has various options. It could conceivably sell its stake to private equity which, as the tilts at Qantas and Iberia have demonstrated, is becoming more interested in airlines. It could try to float its 49pc stake (which looks tricky) or ask Sir Richard to buy back the stake (trickier still).

That’s why many bankers believe Singapore Airlines’ move is the start of a much longer game. The “open skies” deal between the European Union and America is poised to trigger more consolidation between airlines, in which a crucial card is held by Sir Michael Bishop, the controlling shareholder in Bmi, the holder of 11.5pc of the take-off and landing slots at Heathrow – second only to BA’s 41pc.

The theory goes something like this: if Sir Michael exercises his option to sell Bmi to Lufthansa, the German airline could try to engineer the oft-mooted tie-up between Bmi and Virgin Atlantic, which together would have 13.5pc of the Heathrow slots. At that point, Singapore Airlines could sell out, potentially to Lufthansa, with Sir Richard retaining, say, one-third of the bigger airline, plus all the Virgin brand rights.

Bmi’s short-haul network could feed Virgin’s long-haul routes, while there would be further scope to link up with Lufthansa’s partners in the Star Alliance. Such consolidation would deliver a big rival to British Airways, with enough slots to compete properly in BA’s Heathrow backyard.

Says one banker: “This is the big tantalising deal and Singapore could use it to get out, though if this deal ever gets done I don’t know why Singapore wouldn’t want to be in.”

SDP: SIA was not the only company Mr Branson found it easy to do deals with.

In Virgin Mobile (Asia) Pte Ltd found SingTel ripe for the plucking. The two companies had come together to sell cellular phones and Internet services. The US$1-billion deal gave SingTel a 50 percent stake in Virgin company.

So how much was 50 percent in a US$1-billion deal? According to SingTel mathematics, $700 million – the amount it paid to Mr Branson.

The ever ready Straits Times trumpeted: “It was a marriage announcement to beat all marriage announcements” and called Mr Branson a “marketing maestro.” On this last point, the Straits Times was spot on