Virgin/BA/bmi another angle

[Guest doo]

The Sunday Times - Business

May 25, 2003

Branson planned BA takeover — but now BA may buy Virgin

Dominic O'Connell

EXECUTIVES at British Airways will this week be asked to draw up plans for a dramatic bid for Sir Richard Branson’s Virgin Atlantic after it emerged that Virgin had come within a whisker of trying to buy BA.

Branson was close to making a full-blown offer to BA shareholders earlier this year — having started tentative talks with BMI British Midland, the airline chaired by Sir Michael Bishop.

Branson enlisted the support of Texas Pacific Group, the American private-equity firm founded by David Bonderman, one of the world’s most successful airline investors. He was advised on the BA plan — codenamed Project Balloon — by Credit Suisse First Boston.

Sources close to Branson said that after three weeks’ study, he and his advisers decided instead to pursue talks with BMI. The merger discussions became public last week.

BA would say only that it was “watching developments” between BMI and Virgin. But it is understood that John Rishton, finance director, and Roger Maynard, director of investments, will be asked to draw up contingency plans tomorrow.

Senior BA executives say the negotiations could yet lead to a deal involving their company.

“We are not ruling anything in or out at the moment,” said a senior BA executive.

Rod Eddington, chief executive, has told colleagues that a bid for BMI would likely fall foul of competition regulators — the combined group would have more than half of all take-off and landing slots at Heathrow — but a bid for Virgin was not out of the question.

Sources close to Branson say Virgin planned to make its move on BA once its share price slid below 100p — which it did for much of March. The offer would have been pitched at 130-140p, valuing Britain’s flag carrier at about £1.5 billion.

“Our conclusion was that the competition issues would not have been that great, but on balance we decided that the talks with BMI offered a better opportunity,” said one Virgin source.

While Virgin and BMI were eager to pour cold water on the possiblity of a merger last week, senior executives on both sides remain convinced of the merits of the deal. An adviser to BMI said the talks had foundered over Virgin’s projections for its growth and future profitability. “We felt their numbers were a bit racy,” he said.

Meanwhile, Branson will soon announce the withdrawal of the business-class bed-seats that it launched with great fanfare three years ago. The seats — designed for Virgin Atlantic — have turned out to be a costly failure. The axing will be confirmed when the airline unveils its new upper-class cabin in the next month.

Branson has written to Jean-Cyril Spinetta, the Air France chairman, offering to buy the airline’s Concordes, which are to be retired in October. “We would be keen to either work with you in operating your Concordes from the UK or to acquire your Concordes outright,” he wrote last week.