Is Branson's honeymoon finally over?

Tycoon shrugs off the flak as he takes a battering

from his critics.

Michael Harrison

reports

HAS the halo finally begun to slip? This weekend the man who was once ranked second only to Mother Teresa as a role model for the young is looking distinctly less saintly. The man is, of course, Richard Branson, boss of the Virgin empire, and this has not been one of his better weeks.

It began with a demolition job by the BBC Panorama programme on the performance of his West Coast train franchise. It ended with a double-barrelled assault from The Spectator and The Economist, both of which chose to make Mr Branson the subject of less-than-flattering cover stories.

The Spectator's was a piece of ill-tempered polemic charting how Mr Branson has risen to the top on a tide of litigation, news management and self- promotion. The Economist contained a more sober but telling assessment of the financial vulnerability of the Virgin companies and the way in which their true ownership is disguised by a web of offshore trusts.

Little of the information presented was that groundbreaking: Virgin has encountered such flak before and sailed through unscathed to stamp the brand on everything from air travel, bridal wear and a radio station to cola, vodka, personal pensions and cinemas.

But the combination of the twin attacks was enough to wipe the smile off that famously bearded face for once. Speaking yesterday from his chalet in the Swiss ski resort of Zermatt, Mr Branson was not amused by the bad publicity, but accepted it might be partly his own fault. "We have been away for the week so we haven't been able to firefight properly," he reflected. "It could all be just a coincidence of course, but one of the things that came out of the court case was just how much money PR companies are being paid to keep an eye on Virgin. We have a lot of competitors and a lot of enemies out there."

The court case Mr Branson is referring to is his spectacular libel victory over Guy Snowden of the Camelot member GTech - a victory that has done no harm to Virgin's lingering ambitions to take over the National Lottery.

But the libel win has since been overshadowed by a string of setbacks. Virgin has bought out its partner in the Virgin Cola venture, Cott of Canada, after disappointing sales and the failure of the brand to grab more than a negligible market share. Virgin Vodka has also performed miserably and is now on sale only in a handful of duty-free shops and on Virgin Atlantic flights. Then came the collapse of the consortium selected to build the pounds 5bn Channel Tunnel rail link, London & Continental Railways, in which Virgin has a 17 per cent stake.

To critics of the Virgin empire, this run of bad luck has crystallised everything that is wrong with the Branson formula. First, that the brand, Virgin's most important and, arguably, its only real asset, will be devalued through association with failure. Second, that the Virgin strategy of expanding through joint ventures, while a cute way of getting others to underwrite the investment needed for new businesses, also denies Virgin real management control. And third, that Mr Branson is now taking on businesses that have an insatiable appetite for cash, like railways.

According to The Economist's analysis of the accounts of Mr Branson's 40 most important companies, the Virgin empire is barely profitable. It calculates that the Virgin Travel group is making profits of pounds 67.5m on turnover of pounds 886m, mainly due to the contribution of the airline. But it says that six other main Virgin Group companies lost pounds 27.8m on sales of pounds 384m while a further eight companies, in which Virgin has less than a 50 per cent stake, including its two rail franchises, lost pounds 37.5m, of which Virgin's share is pounds 15.4m.

That said, it is all but impossible to grasp the full financial picture at Virgin because its myriad businesses are not held together in a consolidated group but are owned through a Byzantine structure of offshore trusts in the Channel Isles and British Virgin Islands.

Mr Branson did briefly experiment with a public listing, turning his empire, minus the airline, into a quoted company in 1986. But he took the business private again two years later, tiring in part at the disclosure requirements that come with a public quote.

Mr Branson describes the Economist article as "not unfair" but he insists it paints an unduly gloomy picture. "We are in the strongest position we have ever been in. Our businesses are generating pounds 150m of cash a year and almost every new venture we are involved in has strong outside partners to finance it."

The biggest of these is Virgin Trains, the holding company for the West Coast and Cross Country franchises. And if that business goes bad it could bring down the whole pack of cards.

Over the 15-year life of the franchise, Virgin has to make royalty payments to the government of pounds 1.24bn at the same time as funding a pounds 1bn fleet of high-speed tilting trains. It also has to double passenger numbers to make consistent profits.

Funding is intended to come from a market flotation of Virgin Trains this summer. But passenger complaints are running at higher levels some months than in the days of BR and some of the rolling stock is so decrepit that Virgin has not repainted it in its familiar red and white livery. Worse, the disruption caused by Railtrack's pounds 21bn modernisation of the line is likely to mean a further deterioration in the service until early next century.

Mr Branson insists the flotation remains on course and blames the complaints on the heightened public expectations engendered when Virgin took over. But sceptics wonder how the business can possibly be floated against such a backdrop.

The Virgin chairman has been in a similar hole before. In 1992 he raised pounds 510m from the sale of the Virgin music publishing business to EMI in order to shore up the other parts of his empire.

The question now is whether he will have to part company with Virgin Atlantic - valued at between pounds 500m and pounds 800m - to finance his railway ambitions.