Virgin execs in $10m bonanza
By Anthony Klan| 30 April, 2020
Velocity executives walk away with over $10m. Source: Supplied
Key Virgin executives walked away with over $10 million of the money raised from the investors who funded the airline's buy-back of its Velocity frequent flyer program in November, just months before the debt-laden airline was swept into administration.
With more than 10 million Velocity Frequent Flyer members left in limbo holding points they can’t redeem - and as thousands of investors who provided $700m to fund the deal are left facing loses of up to 90c in the dollar - it can be revealed millions of dollars flowed to key executives, in deals signed off by Virgin chief executive Paul Scurrah.
Virgin Australia has confirmed the payments, telling us they were received by “several Velocity Frequent Flyer key executives”, but won’t say who those executives were, or how the $10.45m bonanza was divided between them.
One of the biggest beneficiaries is understood to be Karl Schuster, who resigned as Velocity Frequent Flyer CEO in January, just weeks after Virgin’s massive $700m capital raising was completed.
In late October Virgin Australia launched its offer to raise the $700m from the public to fund its purchase of the the portion of Virgin Frequent Flyer Group which it did not already own.
Virgin held about two-third of the Virgin Frequent Flyer Group and it paid about $700m to Hong Kong-based private equity firm Affinity Equity Partners to buy out its 34.82% stake in the frequent flyer business.
Virgin originally sold that stake to Affinity Equity Partners for $336m in 2014, meaning the private equity firm has made about $364m from the two transactions.
It can now be revealed that under the latest deal, Velocity management were paid out for a 0.52% stake they held in the frequent flyer company, however details are scarce as to how management obtained that stake, and the vast majority of it appears to have been obtained by the executives by way of “bonuses” and acquisitions in the company they made paying peppercorn rates.
In Virgin’s 188-page prospectus for the $700m November raising, it states, at the bottom of page 10, that under the deal “Velocity management will exit from their 0.52% interest in Velocity Holdco (including a 0.23% interest relating to a management incentive plan).”
Velocity Holdco refers to Velocity Frequent Flyer Holdco Pty Ltd, the company which owns the frequent flyer business now 100% owned by Virgin Australia.
The two directors of Velocity Holdco are Virgin Australia’s CEO Paul Scurrah and the airline’s chief financial officer Keith Neate.
“Several Velocity Frequent Flyer key executives were contractually eligible for payments based on Virgin Australia’s completion of the buyback of Velocity from Affinity Equity Partners,” Virgin spokeswoman Mel Ward told us in a written statement.
“We won’t comment further on confidential employment arrangements or current or former employees except to say that Paul Scurrah and Keith Neate did not receive any payment for completion of the transaction”.
Ms Ward declined to comment when asked whether any related parties of either Mr Scurrah or Mr Neate had benefitted in any way from the $10.45m deal.
The involvement of Virgin Australia’s two most senior executives in that deal is expected to draw the scrutiny of Virgin Australia administrators Deloitte, who will hold the first creditor’s meeting for the airline at 11am this morning.
Despite Virgin collapsing into administration earlier this month, the Velocity Frequent Flyer business was not placed in administration.
Generally when a company is placed in the hands of the corporate doctors its wholly-owned subsidiaries are also placed into administration or receivership.
Virgin Australia bond holders, who collectively poured hundreds of millions into the debt-laden airline in November, are expected to query Deloitte today over why the frequent flyer business remains outside the administration business.
Bond holders argue that given their $700m is caught up in the administration, then the company that Virgin Australia used their money to purchase, Velocity Frequent Flyer, should also be placed in administration so they can make claims against it too for the money they have lost.
Based on Virgin paying $700m-odd for the 34.82% stake in Velocity Frequent Flyer group that it did not already own, the Velocity Frequent Flyer group was valued at $2.01bn in November, although it would be worth substantially less now.
The 0.52% stake of Velocity Frequent Flyer group would have been valued at $10.45m under the deal.
The 0.23% that represented a “management incentive plan” would have been valued at about $4.64m.
Virgin’s Ward did not comment when asked whether that 0.52% and the 0.23% (a total of 0.75%) were seperate (meaning the total payment to management would have been just over $15m) or whether the 0.23% was part of the 0.52% (meaning the total payout to management was $10.45m)
Virgin’s accounts show the amount of money to be received by Velocity executives, in the event the company changed hands, soared between 2018 and August last year, raising more serious questions for Scurrah who started as Virgin CEO in March last year.
Deloitte has been approached for comment.
The size of the "bonus" payout the Velocity executives were due to receive exploded by over 2.5 times in the lead up to the November deal, while the total proposed payout the unnamed executives were to receive almost doubled.
Virgin Australia's annual report for the 2018 financial year, released on 14 September 2018, states that aside from Affinity Equity Partners, there are "other non-controlling interests" in the Virgin Frequent Flyer group.
(Here Virgin Australia is deemed to be the "controlling interest" in the frequent flyer group because its two-thirds stake represented more than half of the company).
These "other non-controlling interests" held "an additional 0.28% interest in VFF, including 0.09% relating to a management incentive plan".
But Virgin Australia's annual report for the 2019 financial year, released on 18 September 18 2019, states those "non-controlling interests" now held 0.52% - almost double the earlier 0.28% figure.
The amount "relating to a management incentive plan" was now 0.23%, more than two-and-a-half-times the figure of 0.09% published the previous year.
It remains unclear why executives received the payments and bonuses at all, given the transaction simply represented Virgin Australia increasing its existing stake in a company that it already controlled, and owned two-thirds of.
Regardless, Velocity's performance fell between 2017 and 2019.
Virgin Australia's accounts show Velocity Frequent Flyer group earnings fell from $142.8m in the 2017 financial year to $122.2m for the year to June 30 2019.
At all times, Virgin Australia was the controller and majority owner of Velocity, and so Velocity executives at all times ultimately worked for Virgin Australia, and Virgin Australia would have the final say should there have been a dispute between it an Alliance Equity Partners, given its controlling, two-third stake.
It remains unclear how the Velocity executives came by their $10.25m stakes in the Velocity Frequent Flyer group, a company valued at $2.01bn which they managed, ultimately, for Virgin Australia's shareholders.
Even establishing that those stakes were in fact held by Velocity management is a challenging process.
For example, only in Virgin Australia's capital raising prospectus from November 5 last year is it disclosed that the "other non-controlling interests" referred to in Virgin's earlier annual reports are in fact Velocity management.
That prospectus says executives would exit "their" 0.52% stake in the Velocity Frequent Flyer group.
"In connection with the Velocity Acquisition, Velocity management will exit from their 0.52% interest in Velocity Holdc0 (including a 0.23% interest relating to a management incentive plan)," the November prospectus states.
At June 30 2019, the chair of Velocity Frequent Flyer Holdco Pty Ltd was Virgin Australia director Ken Dean, who was also a member of the airline's remuneration committee.
Dean, a former director of resources companies Woodside Petroleum, Santos and BlueScope Steel, has since stood down from the board of Velocity Frequent Flyer Holdco.
Virgin Australia CEO Scurrah became a director of Velocity Frequent Flyer Holdco in March last year, the same time he joined the airline; and, its one other current director, Virgin Australia CFO Keith Neate, became a director on October 1 last year, corporate filings show.
Virgin's latest annual report states that the Virgin Frequent Flyer group CEO, then Karl Schuster, was paid differently to all other Virgin Australia key executives, with his remuneration "determined by the Velocity Frequent Flyer board within the broader (Virgin Australia) group framework".
It also shows that Scurrah, as one of the two Velocity Frequent Flyer board members, was responsible for determining how former Velocity Frequent Flyer group CEO Karl Schuster would be paid, even aside from his role as Virgin Australia CEO.
Of the Velocity management payment structure, Virgin Australia's 2019 annual report states: "Under the plan, participants benefit in upside business performance in the event Velocity Frequent Flyer investors (the Virgin Australia Group and Affinity Equity Partners) exit from their investment in Velocity Frequent Flyer".
Schuster's part of the $10.45m appears to have been paid to him via an uncommon form of "long-term incentives" (LTI).
Virgin Australia's annual reports, while noting Schuster had a different remuneration structure to Virgin Australia's other executives, do not disclose the value of Shuster's pending payout.
"The LTI value of target for the CEO of Velocity Frequent Flyer is indeterminate due to the nature of Profit Participation Notes with no pre-defined exit or vesting date," Virgin Australia's 2019 annual report states.
Curiously, in Virgin Australia's annual reports, the references (detailed below) to the stakes held by the "non-controlling interests" (who we now know to be key Velocity executives) do not appear alongside any of the references to management or employee remuneration.
Instead, they appear deep in the notes to the financial statements, under the heading "non-controlling interests".
Virgin Australia 2018 Annual Report (published 14 September 2018):
"Affinity Equity Partners holds a 35% interest in the Velocity Frequent Flyer Group. Other non-controlling interests hold an additional 0.28% interest in VFF, including 0.09% relating to a management incentive plan." (p 89 of 116 of FY 2018 annual report)
Virgin Australia 2019 Annual Report (published 18 September 2019):
"Affinity Equity Partners holds a 34.82% interest in the Velocity Frequent Flyer Group. Other non-controlling interests hold an additional 0.52% interest in the VFF Group, including 0.23% relating to a management incentive plan." (p. 88 of 110 of FY 2019 annual report)
Virgin Australia Prospectus, November 5 2019:
"In connection with the Velocity acquisition, Velocity management will exit from their 0.52% interest in Velocity Holdco (including a 0.23% interest relating to a management incentive plan), resulting in Virgin Australia owning 100% of Velocity Holdco." (p 10 of 188 of November 2019 prospectus).