Richard Branson

Three foreign governments will control an additional 3.88% of Virgin Australia after the $69.12 million capital raising offer to the company’s 43,000 retail shareholders fell badly short.

Virgin Australia advised the ASX this morning that only $17.5 million worth of the 182 million 38c shares offered to retail investors were taken up. This left a $51.6 million shortfall (75% of the retail offer) to be distributed evenly between Virgin’s three predators — Singapore Airlines, Air New Zealand and Etihad — which will collectedly lift their combined stakes from 63% to almost 67%. Throw in Richard Branson’s 10% stake and retail investors have been squeezed down from 19.678% of Virgin Australia to just 15.798%. The balance is held by institutions.

Less than two hours after Virgin made its ASX release, the federal government’s Takeovers Panel released its decision explaining why there was no problem with Virgin Australia imposing an artificial constraint on retail shareholders taking up the shares left on the table by their fellow small investors.

Having participated in about 70 capital raisings over the past five years which offered “unlimited overs”, I was very surprised to see Virgin Australia limit the amount of additional shares or “overs” to just 40% of an investor’s  entitlement. This artificial constraint appeared designed to maximise the shortfall and heavily dilute retail investors, the majority of whom are former Toll Holdings shareholders who don’t even hold a marketable parcel worth $500.

After haranguing the board about this apparently deliberate squeeze on Virgin’s retail investors at the company’s AGM in Brisbane on November 20, I gave them until the next morning to change the terms and treat small Australian investors better than foreign governments. Instead, the Virgin board released an ASX statement trying to rationalise why the unlimited “overs” that were encouraged in its previous 2009 capital raising had been severely limited this time.

The likes of OneSteel, Asciano, Wesfarmers, Stockland, Bluescope Steel, Alumina, Billabong, Mirvac, Suncorp and dozens of other companies had all done equivalent non-renounceable pro-rata entitlement offers in recent years which offered unlimited overs.

With the board failing to respond to the Australian Shareholders’ Association Virgin voting intentions report, correspondence or direct debate at the AGM, the only option left was to lodge an application with the Takeovers Panel.

Hopes soared when, rather than dismissing the request, a heavy hitting panel was appointed chaired by Magellan Financial Group boss Hamish Douglas, Tabcorp/ANZ/Leighton director Paula Dwyer and Adelaide lawyer James Dickson. So began a deluge of email submissions, applications and rebuttals involving myself, the ASA, the Australian Securities and Investments Commission, Virgin and Eithad. All of this was done within the highly restrictive media protocols which ban any mention of the fact that proceedings are even under way, let alone discussion of the detail.

Therefore, while the Takeovers Panel confirmed that an application had been received with a press release lodged on the ASX announcements platform by Virgin two days after its AGM, no one was able to say that a panel had been installed.

With the Virgin retail offer under way, the pressure was on for a quick decision, so the panel released a press release on December 3 declaring it would take no action and retail investors would remain limited.

To demonstrate this farce, I made a BPAY application for $52 worth of Virgin Australia shares at 38c. As the proud owner of 29 shares, the offer document said my entitlement was for 11 new shares and a maximum of five more under the 40% cap on “overs”. Seeing as my wife Paula owns 339 shares and declined to participate, I effectively applied for my entitlement to 11 new shares plus her entitlement to 122 new shares.

Virgin will presumably send me a refund cheque for about $48 and instead collect $51.6 million from the favourably treated airline under-writers.

Qantas is right about the unbalanced playing field with foreign governments cashing up Virgin for the loss-making capacity war that is unfolding. Branson is progressively getting out of the way but, when he sells down, the price paid by Etihad last month was a tasty 48c per share.

Retail shareholders were given no such opportunity to achieve prices like this because the Virgin Australia board failed to create a competitive auction for the retail shortfall whereby the three predators should have been competing through an open book build process.

Now, the focus moves to the federal government. Will Joe Hockey allow Etihad and Singapore Airlines to move above 20% and will he allow all three of them to have seats on the Virgin board?