Paul McIntyre: Battle for control of Virgin Blue

The winds of coincidence blew in neatly this week for a bunch of business bigwigs from the 1980s.

John Elliott, the big-talking dealmaker and former Liberal Party president, once hailed as a future Australian Prime Minister, filed for bankruptcy on Wednesday.

It was the same day as the mastermind behind Elliott's formation of Elders IXL and Foster's Brewing group, Peter Scanlon, was lurking just out of sight as his head kicker, Chris Corrigan, argued the need for their hostile A$1.1 billion play for a majority stake in Richard Branson's Virgin Blue.

Corrigan was one of Australia's top investment bankers in the 1980s, running Bankers Trust, before heading off for his own pursuits.

He and Scanlon ended up as the architects behind the wildly successful Patrick Corporation, the listed company which blasted union control off the Australian waterfront in the late 90s with a grand vision of an efficiently integrated shipping, trucking and rail network.

Not so long ago they added an airline to their suite, taking a friendly 45.4 per cent stake from Richard Branson in Virgin Blue.

Now Corrigan and Scanlon - Corrigan was Virgin Blue's chairman until he stood down after making the hostile offer last Friday - want management control of the airline.

Corrigan is not happy with Virgin Blue's performance after Qantas launched its own low-cost rival, Jetstar, nearly a year ago. It has seriously clipped Virgin Blue's wings.

Although still considered one of the more profitable low-cost airlines in the world, Virgin Blue's march up the earnings ladder has reversed and its share of the Australian domestic market has levelled out at 35 per cent. The grand plans for more rapid growth have not eventuated.

Moreover, the arrival of Jetstar doesn't appear to have hurt Qantas - something its one-time minority shareholder, British Airways, said would happen based on its own abandoned experience with Go.

But on January 20, Qantas said its 2004-05 full-year profit would exceed the previous year's pre-tax profit of $964.6 million. That looks like a shiny tick for Qantas chief executive Geoff Dixon, a former marketing executive who even came up with the Jetstar name himself, and takes great pride in being the maestro behind Qantas's highly successful ad campaign, I Still Call Australia Home.

Last year Dixon personally approved a $10 million production budget for a new Qantas ad, making it more expensive than hit Australian films such as Lantana, The Castle and The Dish.

It is all this progress by Qantas and blunders by Virgin Blue that has agitated the Patrick bosses.

Virgin Blue has issued two profit warnings in the past six months; the last on January 19 when chief executive Brett Godfrey said the airline's full-year results for 2004-05 would be 10-15 per cent below the previous year.

The share price headed south by more than 10 per cent to $1.74. It became more of an insult in that four weeks before the second Virgin profit downgrade, Godfrey sold 5 million of his own shares at $1.88.

Those two events did not make the Patrick heavies happy, and hence last Friday they announced their takeover intentions.

On Wednesday, at the Patrick AGM, Corrigan let fly, hinting if he gets control he might even shift the low-cost positioning of Virgin Blue.

"What Qantas have done is they have essentially surrounded us. They've got a lower cost, certainly lower fare service offering at one end and they've got a higher service, higher fare offering at the other end. And we're caught in the middle.

"We take a long-term view that it is a good business. We think that as that company moves from what I call an entrepreneurial phase into a more mature phase of development, we can extract a satisfactory return on capital employed."

Interesting stuff, but Corrigan has still to get past Richard Branson, the Brit Qantas executives privately call the "smiling cardigan" (Dixon, by the way, is sometimes jokingly referred inside Qantas as "the duck" because on a bad day he can be so prolific with a particular four-letter expletive it resembles the sound of a duck quacking).

Branson has already played a tricky card, one Corrigan and Co didn't see coming. The upshot was that it might well have forced Patrick to raise its A$1.90 offer to at least A$2.06, although the Australian Securities and Investment Commission yesterday ruled in favour of Patrick.

Now it is up to shareholders to decide whether they want to sell at A$1.90 when the present share price is trading at A$2.06, after falling 6c yesterday following ASIC's announcement.

Most expect Patrick will have to raise its offer to get majority control of the company, but as Corrigan and Scanlon need only a further 4.7 per cent to achieve their goal, they're being a bit cheeky to see what they can land at a cheaper price.

One thing is for sure - their old mate John Elliott can't help.

Word has it he may even have to offload his red Mercedes.

* Paul McIntyre is a Sydney journalist