How Bain Capital rescued Australia's second-largest airline

Mint

9 hours ago

SYDNEY—With businesses sending workers home at the start of the Covid-19 pandemic, Bain Capital's Mike Murphy dashed to buy his first webcam. While browsing an electronics store, his phone rang for one of the most important calls of his life.
Bain Co-Chairman Steve Pagliuca had heard the Australia office established by Murphy in 2016 was considering a move for Virgin Australia. The country's No. 2 carrier had stumbled under the debt racked up in a capacity and price war with Qantas Airways.
Global fleets had yet to be grounded, but travel demand was plummeting. It was clear airlines worldwide would need bailouts to survive. Pagliuca wanted to know what his local chief was thinking.
'I got a call saying, 'what's this I hear about some Virgin opportunity?'" Murphy, a partner on Bain's Asia-Pacific private-equity team, said.
Instead of picking tech for his home office, Murphy told Pagliuca how Virgin Australia had run into trouble and about the opportunity in funding a turnaround. Key to the deal, Murphy said, was air travel's importance in a country where a third of the population lives across three cities separated by at least 500 miles.
'He got it very quickly," said Murphy. 'We had our chairman very supportive of the concept, subject to the work stacking up."
Three months after that March 2020 conversation, Bain agreed to acquire Virgin Australia out of bankruptcy protection for 3.5 billion Australian dollars, equivalent to US$2.3 billion. Last week, the slimmed-down airline relisted with an implied enterprise value of A$3.62 billion.
After a 15% rise across its first two days on market, the stock is 8.3% up on its initial public offering price.
Bain this year sold a 25% stake in Virgin to Qatar Airways for an undisclosed amount. It remains the largest shareholder with 40% and will stay invested for at least another year.
The IPO was Australia's most anticipated of recent years. Bain, which has over US$185 billion in assets under management, relaunched Virgin into an aviation industry reshaped by the pandemic.
A two-time Olympian with Australia's diving team, Murphy became interested in Virgin in 2019. Already stretched by an attempt to take on Qantas across domestic and international routes, Virgin raised more capital to take full ownership of its loyalty program.
That A$700 million acquisition left Virgin with a debt almost 5.5 times the size of its earnings. As a listed company, albeit one partially owned by Etihad Airways, Singapore Airlines and Chinese conglomerate HNA Group, Virgin's accounts were publicly available.
'Being five and a half times levered for any business publicly, but particularly for an airline, was a pretty alarmingly high level of leverage," Murphy said. 'It was clear that this could be a challenging situation."
On March 20, 2020, that challenge became insurmountable when Australia closed its borders to nonresidents to limit Covid-19's spread. It would be almost two years until the country welcomed visitors again. Domestic fleets were also grounded for long spells.
While Qantas raised capital from equity markets, Virgin entered bankruptcy protection after lawmakers refused financial aid on fears it would amount to a bailout of the foreign carriers that together owned 90% of the airline's stock.
'We mobilized from a couple of thought bubbles in this office to a team of nearly 30 globally working on the deal," Murphy said.
The airline's administrator, Deloitte, slashed costs to keep it afloat but Murphy and his team needed to convince colleagues the deal was worth pursuing. Its complexity meant the investment committee had 11 members rather than the typical seven, with representatives from Bain's private-equity and credit teams.
The final committee meeting began at 11 p.m. Sydney time on Sunday, June 21. With unanimous support essential, the discussion ran until 7 a.m.
'I was in my study watching no planes fly in the sky all night long. It was a very, very rigorous decision-making process," Murphy said.
On June 26, Deloitte, which had allowed 19 potential buyers to look at the books, announced Bain had beaten New York-based Cyrus Capital Partners and a late proposal by an ad hoc group of Virgin Australia bondholders. Bain swiftly injected more than A$100 million to cover short-term costs and set about overhauling the business for when planes could fly again.
The retirement of Virgin's Tigerair budget carrier was confirmed, routes including to Los Angeles were scrapped, and more than 500 contracts were renegotiated or exited. Jobs were cut and employment terms were changed.
The fleet was slimmed down and simplified from seven craft types to three, reducing maintenance and training costs, and improving network flexibility.
'It was a dramatic resetting of the cost base. The administration process allowed us to be able to do things that you can't normally do," Murphy said.
After taking ownership in November 2020, Bain reintroduced some routes, overhauled fare structures, and made investments including in back-office technology and a business loyalty program. By the end of 2024, debt was down to 1.3 times earnings, roughly the same level reported by Qantas.
With travel restrictions over, Virgin's underlying earnings margin improved from 2.9% prior to the pandemic, to 9.4% in the 12 months through June 2024. Its prospectus forecast was for an 11.1% margin this financial year.
Bain moved forward with the IPO shortly after Australia's government approved Qatar Airways' investment in February this year. With staff numbers down by about 20% and revenues growing, the pitch to investors centered on Virgin as a strong, profitable No. 2 player happy to focus primarily on domestic operations.
'A lot of the activity is in Brisbane, Sydney, Melbourne. There's no other alternative in getting between those cities except spending 12 hours driving," Murphy said.
The IPO involved a 30% stake carved out of Bain's holding. Murphy, who this month was fundraising in Tokyo for Bain's sixth Asia fund, said the offering was oversubscribed and that Bain should be able to fully exit within its usual five- to seven-year window.