Outlook: Richard Branson's private dilemma

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The Independent Online
THE HARDER they come, the harder they fall, one and all, as the singer Jimmy Cliff once put it. Jimmy was not one of Richard Branson's recording artists but the Virgin boss must get the idea.

This has not been one of Richard's better years. It began on an upbeat note with the High Court libel victory over Guy Snowden but it has been downhill since then. Both the Economist and the Spectator have taken swipes at the bearded one.

Shares in his airline business Virgin Express have begun to slide and his sale of a half stake in Virgin Rail to Brian Souter was depicted as an act of desperation rather than a stroke of entrepreneurial brilliance. Now, he has been taken to task across two broadsheet pages by the Financial Times.

The Branson empire, so the Pink'Un tells us, is cash flow negative and has a habit of destroying wealth rather than creating it. Judged against the fashionable theory of economic value added, Virgin fails the test.

That is to say, its cost of capital outstrips its return on capital in the shape of profits to the tune of nearly pounds 40m. What is more, the margin Virgin has to service its debts is becoming uncomfortably slim.

According to the FT, interest cover is now down to 1.2 times which would be uncomfortably low even for a staid old public utility let alone a group operating in highly volatile or cyclical markets such as air travel, retailing and entertainment.

Should any of this bother us? After all, people are still buying records in Virgin Megastores, boarding his Virgin Atlantic flights and buying his Virgin Direct Peps. What is more, there are precious few small investors to worry about since the vast bulk of the Virgin empire remains in private hands and safely obscured behind a Byzantine structure of offshore trusts in the Channel Isles and British Virgin Islands. If Mr Branson falls, the crash will be mighty but at least he won't take too many others down with him.

That rather presupposes he is heading for the drop. Mr Branson has been in tight spots before and got out of them. In 1992, with the tide of recession lapping at Virgin's shores, he sold the Virgin music publishing business to EMI for pounds 510m.

In part, the proceeds were used to help pay off the debts he had accumulated by taking Virgin private again after its brief experimentation with a public listing. In part the proceeds were used to fund his cash hungry new ventures like the airline.

This time around, the nature of the problem is rather different. Mr Branson has learnt the lesson of gearing up too heavily just as the downturn arrives and has cleverly made sure that joint venture partners have stumped up the bulk of the cash. He has also ringfenced each of the Virgin businesses to avoid cross contamination. This means that if one business gets into trouble, it does not have a call on another.

Even so the demands on Virgin's financial resources are piling up. Even with Stagecoach sharing half the burden, Virgin Trains will require a lot of capital while Mr Branson has to find pounds 145m to funded his purchase of WH Smith's 75 per cent share of Virgin Our Price. Then there are the cash demands of Virgin Cinemas, the new record company V2 and Virgin Trading.

In the past Mr Branson has sold his past to finance his future.

The obvious solution this time would be a public listing for Virgin Atlantic and perhaps Virgin Entertainment. But a flotation would mean an unwelcome return to the sort of disclosure and transparency requirements from which Mr Branson fled in the late 1980s. That is why he is seeking the alternative route of a high yield bond issue this autumn to raise as much as pounds 300m. Will the capital markets buy it?

It is a matter of trust and judgement for, as the FT notes, it is impossible for an outsider to assess the full extent of Mr Branson's resources or his profitability.