by Bower, Tom
Branson offered to inject £1.3 billion in return for a 55 per cent stake of the bank’s £94 billion of assets. Virgin Money, said Branson, would invest up to £250 million, although there were doubts whether this was cash or his valuation of the Virgin Money brand. £400 million in real cash was offered by Wilbur Ross. The remaining £650 million, Branson proposed, should be put up by the existing shareholders, although he did not explain how they could be persuaded to commit more money to a bad investment. To repay the government’s loans to the bank, he proposed to raise £11 billion from other banks instantly and to borrow a further £13 billion over the following three years. The security for the huge loan, said Branson, would be a government guarantee. ‘We feel we have a winnable [sic] package,’ he said. ‘I believe it’s the best option because we would rebrand it the Virgin Bank, which is a very strong brand.’ Alistair Darling supported Branson’s bid. Critics highlighted Branson’s trivial conditions: his proposal to charge £10 million a year for using the Virgin brand and his stipulation that the shareholders should pay £5 million towards his costs for the takeover. The more serious criticism was that he had seemed to have forgotten that Northern Rock had collapsed precisely because established banks had refused to lend money to the insolvent institution. Unable to borrow money themselves, they were unlikely to lend £24 billion to Virgin.
To resolve the doubts about Virgin’s plan, Gordon Brown spoke to Branson over a weekend. Days later, the prime minister announced that Virgin was the government’s choice ‘to steer the course of stability and protect the taxpayer’. Northern Rock’s shares surged by 20 per cent. ‘We have made it clear’, said a Treasury spokesman on 29 November, ‘that we support the Virgin Group as a preferred bidder but we have always said we are keeping all other options open.’ There was one other realistic bidder.
Brimming with confidence, Branson issued full-page advertisements in national newspapers addressed to Northern Rock’s depositors. ‘I have the greatest respect for customers,’ he wrote, ‘and I hope you will continue to be a valued customer of our new and exciting bank.’ Under Virgin, he continued, they would receive better service, their savings would be protected and Northern Rock’s debts to the Bank of England would be repaid. The value of Virgin’s investment, he predicted, would double within three years. With limited risk, Branson expected to earn £1.5 billion, while the taxpayer would receive at most £500 million in return for risking over £24 billion.
The depiction of Branson paying a fortieth of the bank’s original value and channelling the profits into his tax-free Caribbean bank accounts resurrected well-rehearsed questions about his reliability. Ever since his unethical buy-back of Virgin Music shares, the hippy outsider had few friends in the City; not so much because of Virgin’s sleight of hand but more on account of the consistent losses suffered by its publicly owned companies. Among his most hostile and prejudiced critics, he called to mind the pavement artist performing the three-card trick instead of a serious financier who could be trusted to care for £65 billion of mortgages and £24 billion of loans. Virgin Money did not have a banking licence to accept deposits of money, but it asserted its directors were ‘fit and proper’.
Entrusting Branson with public money roused Vince Cable, the Liberal Democrats’ financial spokesman. Branson’s past, said Cable, made him unreliable as the government’s partner, even if he would not be a director of the enlarged Virgin Money. ‘Branson’, he said, ‘is the front man for a consortium of hedge funds and private-equity operators whose aim is to make a killing from a highly leveraged acquisition.’ Virgin Money, he continued, was a branding and marketing organisation lacking the credibility to manage a bank. Barred by his tax status from spending more than ninety days in any year in Britain, Branson could only fume offshore that ‘Virgin’s plan and the Virgin brand will attract customers, get growth and earn rewards.’ Off the cuff, he promised taxpayers a £5 billion profit. Although the City shared Cable’s opinion that Branson’s promises were a gamble, Gordon Brown disagreed. To protect his reputation, the prime minister wanted to avoid nationalisation, not least because he would be accused of nationalising the losses. The alternative he favoured was to privatise the profits, although both options were unpalatable to politicians.
Over Christmas, Brown despaired. Treasury officials judged Branson’s solution to be credible, but Cable’s criticisms had gained sympathy. While the prime minister fretted, Branson jetted around the world on his Falcon, being anointed ‘Citizen of the Year’ by the UN, meeting Nelson Mandela and addressing pupils at the Branson School of Entrepreneurship in Johannesburg. In the new year, Brown resolved to trust Branson, and the businessman was invited to join the prime minister on a business tour of the Far East on 18 January 2008. Just before leaving from London on a chartered BA flight to Beijing, Branson mentioned that he was ‘fairly confident’ that a deal could be struck with the government. Soon after take-off, he moved to the front of the plane and sat with Brown, boasting to the accompanying journalists on arrival that during the journey he had presented what he called a ‘winnable package’ to rescue Northern Rock.
Questioned about giving Branson preferential treatment, Brown denied having any discussions about Northern Rock during the trip. ‘I haven’t spoken in any detail to Richard Branson,’ said the prime minister at Beijing airport. ‘There was no cosy arrangement. The commercial decisions are not a matter for me.’ Then Branson also went into reverse, denying even speaking ‘one to one with Brown’ about Northern Rock. ‘We avoided discussing the matter,’ he insisted. ‘If I did want to have a word with the prime minister, I would not board a British Airways plane with 100 journalists aboard.’ Two nights later in Shanghai, Brown appeared with his wife at a party hosted by Branson. Cable exploited the contradictions: ‘If Gordon Brown’s mate Richard Branson is going to become the private buyer, he’ll be laughing all the way to the Bank of England.’
Political pressure compelled the government during late January to stiffen the terms of the sale in its favour, forcing any buyer to guarantee repayment of the government’s loans. Virgin’s only competitor withdrew, and Branson became convinced that he held all the cards. The government had no alternative to accepting his terms – other than nationalising the bank. Then Virgin changed the terms of its offer, reducing its payment. ‘There’s not much room for sharpening pencils,’ said Branson. Brown’s negotiators were surprised by the rough tactics. On the same day, the shares of Virgin Mobile USA fell to $6.12 from their $15 flotation price. Virgin Blue’s shares in Australia also slipped, to A$1.30, half their flotation price. In the financial crisis, Virgin companies were suffering more than others. Treasury officials perceived a gap between Branson’s promises and performance and, after Virgin changed the terms of its offer, started to question the company’s sincerity.
Cable returned to the attack. He described Branson’s bid as a ‘con’ and doubted whether he was ‘fit and proper’ to run Northern Rock. In Cable’s opinion, Branson’s arrest in 1971 for masterminding over twelve months a tax fraud worth £500,000 in today’s values made him unsuitable ‘to run a public company, let alone a bank, and let alone as someone responsible for £30 billion of taxpayers’ money’. After all, said Cable, Branson’s personal tax status in Britain was questionable. ‘There are serious public-interest grounds for worrying about the Branson bid,’ he wrote. Replying from Necker, Branson accused Cable of ‘ignorance’ and complained that his request for a meeting had been ignored. ‘Perhaps you could explain why this is a sweetheart deal?’ he asked from the Caribbean, but the political argument had been lost.
Alistair Darling now switched sides. ‘The numbers’, he agreed with his advisers, including Goldman Sachs, ‘do not stack up.’ Virgin’s bid, advised the government’s bankers, carried ‘a degree of risk for taxpayers’ because Virgin would be given a ‘very significant subsidy’ to make a profit, while the taxpayer had no realistic chance of earning any return. In headline terms, the risk of entrusting custody of £94 bi
llion to someone of questionable credibility wrecked Branson’s hopes.
During the morning of 17 February 2008, while Virgin’s representatives were still negotiating with Treasury officials, Darling composed an announcement nationalising the bank. Branson cursed that Brown had ‘bottled out’. His hopes of owning a major bank and earning £1.5 billion had been stymied.
One month later, the financial crash in New York began. First Bear Stearns imploded, and in September Lehman Brothers was declared insolvent. The world’s financial system was tipping into the abyss. Despite the havoc, at the end of October Branson stuck to his plan to relaunch Virgin Money in America. As usual, his campaign was contrived to get free publicity – on that occasion by breaking the transatlantic sailing record. Branson would be aboard Virgin Money, a yacht with twenty-four crew moored in Manhattan. His timing was odd: not only was Wall Street in crisis but meteorologists were forecasting an imminent storm in the Atlantic. Nonetheless, unwilling to abandon the voyage, Branson ordered Virgin Money to sail. Two days later, a huge wave damaged the yacht and the crippled craft crept back to harbour.
Branson began reconsidering his investment in CircleLending. The banking crisis had wrecked the housing and mortgage businesses and many peer-to-peer lenders were insolvent. CircleLending had survived, but Branson and Jayne-Anne Gadhia had lost confidence in Asheesh Advani. The company’s founder had bought Lendia, the biggest wholesale mortgage lender in north-east America, but the software of the combined organisation was malfunctioning. The losses were mounting. Branson’s hopes of using CircleLending as a foundation of a Virgin bank had foundered, and New York’s bankers were ignoring a man they labelled as a music producer. Abruptly, Gadhia changed strategy. Banking was draining Virgin’s financial resources. Virgin Money, she recommended, should abandon mortgages and transform itself into a pure bank complying with the regulations which CircleLending had avoided. Branson’s promise to Advani to expand the business was forgotten, and in 2008 he merged CircleLending with Graystone Solutions Inc., sold out and made a swift exit from banking in America.
The costly disappointment was once again compensated for by a stroke of luck.
9
Turbulence
On 27 March 2008, British Airways’ operations at Heathrow collapsed in chaos. Hours after Terminal 5, the airline’s £4.3 billion showcase opened, twenty years of planning were wrecked. Computers malfunctioned and untrained staff shunned desperate passengers. Dozens of flights were cancelled and thousands of suitcases lost. In the terminal, BA’s passengers were close to rioting. Incompetent managers offered apologies and shredded BA’s reputation. Branson did not conceal his delight. The airline’s highly paid cabin staff, he knew, were also planning to strike.
BA was ‘doomed’, Branson announced in the midst of a party he was hosting to celebrate Virgin Atlantic’s launch twenty-five years earlier. As he reminisced about the arrival of Virgin’s first flight at JFK, when the doors of the second-hand Boeing 707 were opened to reveal the debris of a wild champagne-soaked party, his abuse escalated. BA’s share price, he chortled, had tanked. ‘I thought of buying it,’ Branson sniffed to admiring journalists, ‘but it’s not worth much any more.’ BA, he scoffed, would soon collapse, ‘but it’s not worth the government bailing it out’. He added, unsmilingly, ‘We’re ready to take over British Airways’ routes and slots.’
Carping about the vulnerable was Branson’s speciality. During the same brief visit to New York, he also mentioned that a major American airline was sinking: ‘I don’t think I’ll get into naming names, but I will be surprised if one, in particular, of the US carriers is around in eighteen months’ time.’ The demise of rivals evoked no sympathy. ‘Let inefficient airlines die peacefully,’ he said. Alitalia, he added, should also be allowed to go bankrupt and possibly be taken over by Virgin. Branson’s bravado reflected his relief at overcoming a succession of problems.
The most costly burden was Virgin America, his newest airline. Ever since a launch party was disrupted by torrential rain at Kennedy airport in July 2007, Branson’s confidence about his challenge to Southwest and JetBlue, the grubby budget airlines, had been shaken. Virgin America’s unusual comfort – including leather seats, wireless internet, touch-screen entertainment and attentive service – attracted praise, but Branson’s confident forecasts of profits within two years had not materialised. Buffeted by high fuel prices and the financial crash, his entrenched rivals had counter-attacked, cutting their fares by up to 50 per cent. As a last gasp, Alaska Airlines complained that Virgin America was ‘operating illegally’ after the two original investors sold out. Virgin, the airline complained, was no longer genuinely American. The complaint was rejected, but the dream had been dented. Just ten months after the inaugural flight, Virgin America reduced its capacity by 10 per cent and sought permission to conceal its $227 million losses. Continued survival depended on Branson guaranteeing funding for the airline. Virgin America had been sustained by A$158 million of profits earned by the launch of Virgin Blue in Australia, but in 2008 the battle for survival in America was being mirrored Down Under.
In Branson’s topsy-turvy world, he had initially been lukewarm about a cut-price Australian airline. The idea was Brett Godfrey’s, whose involvement at Virgin Express, an indebted cut-price European airline, had ended without glory. Ignoring Branson’s indifference, Godfrey had established an office in Sydney, and with four others targeted Ansett, Australia’s second airline, which operated 40 per cent of the internal flights in Australia. Bad management and trade-union restrictions were wrecking Ansett’s finances. ‘I don’t think it’s going to work,’ Branson told Godfrey on the telephone. ‘I’m not coming to Australia.’ Eventually, he invested about A$15 million in exchange for 95 per cent of the company. Godfrey could expect to receive a comparative pittance for his work.
Branson’s lure undoubtedly brought opportunities, and occasionally he was blessed. On that occasion, his timing was astonishing. The 9/11 terrorist attacks toppled Ansett. Virgin Blue’s planes had just started flying, and the airline was the only bidder for Ansett’s check-in desks, equipment and slots at Australia’s airports. Branson’s low offer, replied the Macquarie bank administering the insolvency, was unacceptable. ‘The bank’s demands’, Branson retorted, ‘are extortionate. The public will suffer because fares will be pushed up.’ He cut a deal, and one year later his bluster was rewarded when, in March 2002, he sold a 45.5 per cent stake in Virgin Blue for A$500 million (£221 million) to Chris Corrigan, the quietly spoken chief executive of Patrick Corporation, an Australian investment company. In December 2003, a further 25 per cent was sold for US$158.3 million (A$240 million) in a flotation. As usual, to avoid paying tax, he directed that his profits should be transferred to Virgin Holdings and Cricket, a personal trust, both based in Switzerland. He was stopped by the Australian government’s insistence that he should first pay capital-gains taxes. His litigation against the government would fail.
In 2005, Virgin Blue carried about a third of the passengers on Australia’s internal flights but was losing money battling against Qantas and Jetstar. The value of its shares collapsed. Open warfare broke out between Branson and Corrigan. ‘Branson doesn’t listen,’ said Corrigan, complaining about Branson’s obstruction. ‘He’s an ageing Bee Gee with a beard. You never want to assume he’s your friend.’ Corrigan became the majority shareholder and referred their argument to arbitration. Testifying under oath, Branson was uncertain about key facts and lost. Later, the two men met for a drink on Bondi Beach and agreed to stop their war. To Corrigan’s surprise, Branson withdrew from their truce the moment he heard that Corrigan’s company had been targeted for a hostile takeover bid by Paul Little of the Toll Corporation. Branson negotiated with Little that he would buy Corrigan’s 62.4 per cent stake in Virgin Blue if Toll was victorious. Little did defeat Corrigan but went back on the agreement. Two years later, Virgin Blue was booming, earning profits of $98 million. Branson’s stake was again valuable.
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br /> By summer 2008, the fate of all Branson’s airlines appeared to be positive: his original A$15 million investment in Virgin Blue had created an airline that at one stage was worth A$2.5 billion (US$1.9 billion); Virgin America was haemorrhaging money but could become profitable; and, thanks to BA’s chaos, Virgin Atlantic’s profits would double that year to £68.4 million. By contrast, BA’s losses were £401 million. Then, suddenly, his good fortune soured.
Virgin Atlantic’s fate had always been precarious but it survived by attracting passengers thrilled by the promise of non-stop parties that started in the airport lounge. Branson’s cheeky disregard for the truth still won admirers. ‘I always travel with a bar of Cadbury’s Whole Nut,’ he told an interviewer, who then asked, ‘Do you fly upper class?’ ‘No,’ replied Branson, ‘I always book economy.’ By then, Branson regularly flew in his Falcon and had virtually abandoned his popular habit of greeting Virgin Atlantic’s passengers with a notebook to record their comments as they crossed the Atlantic. His growing detachment from the day-to-day business was reflected in a complaint posted on the internet by a passenger about the food served on a Virgin flight from Mumbai to Heathrow.
‘I love the Virgin brand,’ the passenger emailed Branson, ‘I really do which is why I continue to use it despite a series of unfortunate incidents over the last few years. This latest incident takes the biscuit. Ironically, by the end of the flight I would have gladly paid over a thousand rupees for a single biscuit following the culinary journey of hell I was subjected to at the hands of your corporation.’ The passenger attached photographs of a sponge dessert served with tomato and peas, and a heap of yellow liquid which he assumed was custard but was in fact mustard – ‘More mustard than any man could consume in a month.’ Starving and distraught, the passenger reached for the cookie on his tray, which came, he wrote, in a ‘baffling presentation’. The photograph, he told Branson, suggested that the cookie was an ‘evidence bag from the scene of a crime. A crime against bloody cooking. Either that or some sort of back-street underground cookie, purchased off a gun-toting maniac high on his own supply of yeast … Imagine biting into a piece of brass, Richard. That would be softer on the teeth than the specimen above.’ Exhausted, the man tried to enjoy ‘your world-famous onboard entertainment’. He attached a photograph of the image: ‘It’s just incredibly hard to capture Boris Johnson’s face through the flickering white lines running up and down the screen … I was the hungriest I’d been in my adult life and I had a splitting headache from squinting at a crackling screen.’ He ended his letter: ‘My only question is: How can you live like this? I can’t imagine what dinner round your house is like. It must be like something out of a nature documentary.’ The apology from Virgin’s customer-relations department was perfunctory: an employee expressed surprise that the passenger had disliked Virgin’s ‘award-winning food which is very popular on our Indian routes’.