Toll spins off Virgin stake with dividend

A AAP report says that Toll Holdings will exit its majority stake in Virgin Blue by paying a special dividend to shareholders, using its shares in the airline.

The move follows years of speculation about what Toll would do with its 62.7% interest, which it inherited from the takeover of stevedore Patrick in 2006.

Toll has always maintained it did not intend to be a long term investor in the carrier, which operates domestic flights within Australia as well as routes to New Zealand and the Pacific.

But financial markets had expected some sort of trade sale, rather than the in specie dividend and share distribution plan announced today.

The special dividend to Toll shareholders will be worth about $330 million, with shareholders receiving the Virgin Blue shares on a one-for-one basis.

Toll will distribute about 648.1 million of its Virgin Blue shares, or about 98.3% of its total holding, leaving the logistics giant with 11 million shares.

A share sale facility will be set up to allow Toll shareholders to sell off their shares.

Toll managing director Paul Little said the decision will allow both companies to pursue their own development strategies, with Toll focussing on its core logistics business.

Toll chief financial officer Neil Chatfield said the group’s balance sheet would be strengthened by the transaction.

”The strength of Toll’s balance sheet following the Virgin Blue distribution, together with the recently completed sale of the New Zealand rail and ferry operations, positions the company extremely well to take advantage of lower acquisition valuations becoming available in the sector,” he said.

The decision to distribute most of the shares will result in a non-cash charge in Toll’s 2007/08 year of about $1.3 billion, reflecting the lower value of its stake.

But Toll’s net debt after the transaction will be about $650 million, giving the company with significant funding capacity, Mr Chatfield said.

Toll shares rose 1.57% or 10 cents to $6.48 in early trading, while Virgin Blue rose 1 cent to 51.5 cents.

Virgin Blue, like airlines around the world, has been battling record high jet fuel costs but reducing capacity and cutting its operational expenses.

”We see Toll’s exit as an opportunity to introduce long term investors to the company,” chief executive Brett Godfrey said.

Toll’s plan should increase the liquidity in Virgin Blue’s shares, which have fallen from about $2 in January.

”Despite the difficult trading environment that we are facing at the present, the longer term outlook for the group is very strong,” Mr Godfrey said.

”With regard to the ongoing strategic review of the business, further initiatives will be announced in the near future concerning capacity management and new revenue initiatives.”

Last month, Virgin Blue announced capacity reductions and a $50 million package of cost savings to help offset the impact of record jet fuel prices. Fuel accounts for about 35 per cent of the company’s cost base.

Virgin Blue today confirmed its April 11 guidance for a fiscal 2008 underlying net profit in a range of $132 million to $137 million.

The forecast excludes $40 million of development costs related to initiatives being launched in 2008, such as its long haul airline offshoot V Australia.

”The company’s balance sheet and cash reserves remain strong and based on current trading conditions the board sees no requirement for additional equity raisings in the foreseeable future,” Virgin Blue added.

Virgin Blue co-founder Sir Richard Branson said his Virgin Group had enjoyed working alongside Toll over the past two years.

”Virgin Group remains a long-term committed cornerstone shareholder in Virgin Blue and has a high degree of confidence in Virgin Blue’s business model and future,” he said.

Toll will treat Virgin Blue as a discontinued operation in its 2007/08 financial year accounts.

Toll will retain links to Virgin Blue through a long term freight agreement.

After the transaction, Virgin Blue expects to qualify for inclusion in the Australian Securities Exchange ASX300 index.

A Report by The Mole from AAP