For anyone wondering how the Virgin Group has been funding Virgin Galactic over the past decade, the Financial Times had an excellent overview back in early November just after SpaceShipTwo crashed.
It seems that Virgin Galactic had sucked in up to $600 million in investment by that point, with nearly two-thirds of it from Abu Dhabi. The Virgin Group also has been funding the rest using profits from other parts of Sir Richard Branson’s empire.
For Galactic’s business model, Virgin followed a well-worn route. The group’s favoured start-up model relies on private investment for financing, with generally a co-investor sharing equity, and therefore the financial risk, often with a large amount of debt to the parent company loaded on to the balance sheet, a model it has followed at most of its businesses since the group’s brief but painful experience as a London-listed company in the 1980s.
So far, Virgin says, Galactic has sucked in up to $600m of investment, $380m of which was provided by Aabar, Abu Dhabi’s state investment agency. The Aabar money has now been spent, but Virgin says its partner is not expecting a swift return on its money nor pressing for an exit.
The structure of the Virgin Group allows cross-subsidisation of its different businesses. Now that Virgin Galactic has burnt through the Aabar investment it is being financed from cash held by VGH itself. Virgin will not confirm that this has diluted Aabar’s equity, suggesting that the bulk of the additional financing is in the form of debt. [Virgin Group Holdings CEO Josh] Bayliss says Virgin is not seeking an additional equity injection from Aabar, nor a new equity partner for the venture….
If Sir Richard did decide to abandon Galactic, repaying Aabar’s $380m investment, the $89m in advance ticket sales and the hit to its own balance sheet of $220m-plus, would not be overwhelmingly onerous for the group, given VGH’s portfolio is valued at more than £5bn. Continuing with it, though, is a rather different matter.
Because VGH [Virgin Group Holdings] is run like a private equity company the question is how secure are the cash flows to bankroll Galactic and other Virgin businesses, which are at varying stages of development and profitability. How long can VGH sustain the cash drain?
Sir Richard told the FT last month that the group was “in the strongest position it’s ever been in”, “cash-rich” with no net borrowings. It is also pressing ahead with the initial public offering of Virgin Money, which owns the “good bank” assets from failed UK mortgage lender Northern Rock, and of Virgin America, the US airline in which it has a 22 per cent stake, lodging its prospectus with the Securities and Exchange Commission on Monday.
The Virgin Money and Virgin American IPO’s were done within a day of each other less about two weeks after SpaceShipTwo crashed. The Financial Times says the IPO’s would provide the Virgin Group “some useful cash in hand” to support other ventures that are not making money.
The newspaper also reports the Virgin Group has been focusing a lot of its recent expansion in the North American market, where Branson has struggled to establish himself and his brand. Virgin Galactic was an integral part of that strategy, with Branson attempting to use it to create a “halo effect” on the rest of the company. That will only work, however, if Virgin Galactic recovers from the SpaceShipTwo accident and succeeds in establishing a space tourism business.