Patrick rejects Toll bid and says Virgin Blue is promising

The Patrick Corp said Tuesday that earnings at its majority-owned discount airline Virgin Blue Holdings Ltd will rise in the years ahead despite high fuel prices and intense competition from Qantas and its cut-price arm Jetstar.  

In a statement rejecting Toll’s hostile A$4.3b+ takeover bid for Patrick, the parent company said it believes Virgin Blue’s outlook is “very promising.”  

Earlier on Tuesday, Virgin Blue said it expects a net profit of around A$105 million in its fiscal year ended Sept. 30, 2005 reflecting intense competition from Jetstar, which, combined with increased capacity from both airlines, resulted in downward pressure on load factors and average fares. 

“This was compounded by a significant increase in the price of fuel, particularly in the second half of the year,” said Patrick, which is unhedged against fuel prices.  

However, the group’s guidance is higher than the A$90 million to A$100 million it had previously forecast and Patrick expects the carrier’s revenue to be about A$1.75 billion for the year.  

Patrick’s share of Virgin Blue’s earnings before interest, tax and amortization for the year will be around A$80 million and it expects EBITA to rise 38% in the 2006 financial year and a further 53% in 2007.  

“Virgin Blue is expected to benefit from improvement in yields as a result of key initiatives that are aimed at further differentiating the Virgin Blue experience from Jetstar and making the product more attractive to the higher yielding corporate and government travel markets,” Patrick said.  

Patrick spent A$346 million lifting its stake in Virgin Blue to 62.4% from 45.9% earlier this year, but under Toll’s cash-and-share takeover offer, the combined company would sell most of the stake and allow Richard Branson’s Virgin Group Ltd to take a bigger share.  

Toll has offered 0.4 Toll shares, 75 cents cash and a dividend from Patrick of 0.3 Virgin Blue Holdings shares for each Patrick share, which Patrick said represented a cash component of just 12%.

 Branson welcomed the proposed ownership changes, which would boost his stake in Virgin Blue to at least 40.6% from around 25% and enable him to assert greater control.  

The U.K.-based entrepreneur has been critical of Virgin Blue’s slowness to adopt initiatives including passenger loyalty programs and failure to hedge against soaring jet fuel prices.

However, Patrick said Virgin Blue is working on a number of products for launch in the new year to help it snare market share from Jetstar, including a frequent flyer program and introducing live television on its aircraft, which it hopes will boost profitability and passenger numbers.  

It expects the initiatives to boost yields and result in 5% to 7% domestic passenger growth. Virgin Blue carried around 13.4 million passengers in the 2005 financial year.