By Ben Rickman 

“…The company is not aware of any explanation for the price change and increase in volume in the securities, other than the current market volatility and economic uncertainty...”

Fairly staid and guarded words really from the Virgin Blue company secretary when formally asked (on March 13th this year) by the Australian Stock Exchange to explain the drop in Virgin Blue (VBA) shares over the preceding 11 trading days.

Fair question too - given that VBA had fallen some 46% in that period, touching a frightening low of $0.15. Only six months earlier the stock traded as high as $0.60.

Of course, even this number is a far cry from the listing price in December 2003 of $2.25. Let’s think about this for a minute: $10,000 invested in VBA shares at $2.25 would have been worth $666 on the 12 March 2009. Any reference to the devil is entirely co-incidental and completely unintended…almost.

I digress. As a point of reference (and acknowledging that they are very different businesses), $10,000 invested in Qantas in December 2003 would now be worth $4,784.

So where to from here for your beloved VBA shares? Well for those of you that do own them, well done and congratulations for hanging on in there. You are about to be rewarded. No, you’re not about to get a dividend…that’s been scrapped. No, you’re not about to receive a free beer during the flight or discount fares either and, as a shareholder, you shouldn’t want to – Virgin’s margins are already far too slender.

Actually your reward, initially, may seem like a poisoned chalice... Yes you guessed it, it’s more shares. Well an invitation for you to buy more shares anyway. Why? Virgin wants more cash and they don’t have a huge range of options to raise it.

Whoa, they need more cash you say, what is that telling us? Well, significantly, the company has no refinancing obligations or debt covenants over its existing asset-secured liabilities. The type that bought ABC Learning Centres and aircraft leasing company Alco Finance to their respective knees for example.

The commonly held belief reasons that Virgin needs the cash to better withstand further pricing pressure from competitors and to provide on-going liquidity. And once they have battled through this current economic period, by increasing their capital position, Virgin could be expected to use its improved financial flexibility to support growth opportunities, including further new routes and aircraft.

Regardless of why they need it, it will make a big difference. The company held approximately $475M in cash and deposits to June 30th 2009, which is healthy. This fully underwritten capital raising will really shore things up though, bringing that number to around $705M. Incidentally, Qantas had approximately $3.6 billion in cash and deposits to the same period.

So offering up a one for one entitlement offer is an attractive option for the Virgin board and, for you as an investor, it could be a handy little fillip. You see, to be palatable to a share registry already completely beaten about the ears and probably bleeding from a number of other investment wounds, the offer needs to be good, very good. And it is.

Infact, on today’s price of $0.38 it’s more than 45% in the money. Let me explain.

For an investor who currently has say 5,000 shares – the value today at 38 cents is $1,900. Under the terms of the offer our brave investor can elect to purchase an additional 5,000 shares for only $1,000. A $900 gain may not sound like much but it will probably pay for your next few meals at Tullamarine… just.

But wait, there is more. The pluckiest of share holders can actually apply for more shares in excess of their entitlement. It is a big call but this means that those amongst us with a Rocky Balboa-like constitution can double, triple… hell if you’re keen, quadruple up. So there it is - your reward for being a loyal shareholder. Let me repeat the numbers one more time: on today’s price, every 5,000 new shares is $900 up.

Now it is important to understand that the granting of excess shares is at the discretion of Virgin Blue and will only be available should they not raise the full amount which they are likely to do. But if you could buy a seat to London for the normal cost of getting to Singapore – you probably would. And if you could pick up another seat for your wife, your husband, your butler…you probably would. Especially if you were already on board that flight. (Note that you had to be a VBA share holder at 7PM on the 30th July to participate).

There are, of course, risks and you have to wonder how many share holders are participating with a view to dumping the new stock shortly after taking ownership, which will effect the immediate short term price.

However, with an improving economic outlook and a much better outcome from their very pricey fuel arbitrage of 2008-09 (fodder for another time) $0.20 will likely prove a cheap entry price.

In fact, through bolstering its cash reserves, could it be that VBA is signalling to its competitors on the Sydney - LA route that it now has the time on its side to persist with the loss-making V Australia fares, whilst it slowly builds market share? Maybe.

Could it be that there is more to the recent media speculation of a VBA – Air NZ marriage? Maybe. Increasing the enterprise value of VBA certainly makes this option more probable than before the capital raising. Although, it looks to me, with some 22 new routes and 14 aircraft having been bought on line in very recent times  as if they are hell bent on going it alone and I for one am going with them.