Webjet's 17 Tense Days of Survival in ICU

The Australian Financial Review, 9-13 April 2020, by Anthony Macdonald, Sarah Thompson and Tim Boyd (edited version below)

Editor’s note: Roger Sharp, who founded North Ridge Partners, is also Chairman of Webjet. At North Ridge Partners, we didn’t see Roger for a few weeks when he went into the trenches with Webjet Managing Director John Guscic, CFO Tony Ristevski and the team from Goldman Sachs to get this tough deal done.

Click through to the full text of the article here.

___

Roger Sharp was mountain biking in Central Otago, on New Zealand’s south island when his phone rang. It was Webjet CEO John Guscic calling from Europe. The coronavirus was spreading and business hotel bookings, the company’s biggest earner, had come to a sudden halt.

Drop everything and get to the company’s St Kilda Rd headquarters, was the plan. The pair needed to assess the damage and work out what’s next.

The Webjet chairman recognised a code red situation. He had seen the 1987 crash, was running an investment banking team in Hong Kong when the Asia crisis hit and remembered the global financial crisis like only yesterday.

So Sharp dropped everything and got to the airport, bound for Melbourne. How different it was to his last trip, only four weeks earlier, for the travel group’s half-year results. Webjet’s numbers were ahead of forecasts and on track for the full-year. Coronavirus was a small concern – but weeks later had the business on its knees. He arrived on Monday, March 16. It was day one of a 17-day white knuckle ride.

Sharp and Guscic had worked together as chairman and chief executive for six years. Both understood their roles. Sharp is non-executive chairman and doesn’t run anything – that’s Guscic’s job.

Webjet CEO John Guscic flew in from Europe and quickly went about trying to save the company. But it became pretty clear everyone would need to roll up their sleeves. Together with Webjet chief financial officer Tony Ristevski and chief commercial officer Shelley Beasley, they huddled inside Webjet HQ.

Guscic outlined the situation. The company had gone from a $4 billion annual sales run rate to almost nothing. Overheads were about $25 million a month and there was $100 million cash on hand. The company could be bankrupt in 90 days.

Project North was born. And with it a commitment from the tight four-person team to work 20 hours a day to find a lifeline.

Webjet HQ at 509 St Kilda Road would soon be empty, as the company's top executives went about saving the company from their respective homes.

If they were going to survive, they would need answers to five questions; how much can overheads be reduced and how quickly? How long can Webjet survive for in “low burn” operating mode with a capital injection? How quickly or slowly will it be until business picks up again? What will Webjet look like on the other side? And what multiple will its shares trade at when it gets there?

A few things were decided quickly: monthly overheads could be cut to $15 million and Webjet wanted to come out of the downturn swinging. There was no desire to cut into the muscle of the business and see experienced and high-quality staff walk out the door.

They knew they would need capital, and wanted enough capital to survive 12 months without recording $1 of revenue. No investor could knock them for forecasting zero revenue. So, they came up with a narrative they hoped would lure investors of all types. Webjet would emerge from the downturn well capitalised and strong, and increase margins and market share once it was all over. It was a “survive to thrive” type pitch.

Sharp headed to Sydney for the next part of the plan; finding capital. He checked into a hotel on Sydney Harbour, funnily enough looking right at The Ruby Princess, a cruise ship that would become another chapter in the coronavirus story.

Sharp was in Sydney to line up investment bankers to help raise the capital and save the company. He landed in what would become the final week for meetings in Sydney’s tall towers, heard the pitches and hired Goldman Sachs, Credit Suisse, and Ord Minnett.

The bankers quickly stitched up an equity deal and took it to fund managers. The $250 million raising flopped, attracting only about $100 million of support. Webjet was out of luck.

Prior to the investor soundings, Sharp had snuck back into New Zealand to get home just before the borders shut. Lockdowns and closed office towers meant everyone involved was working from home by that stage, and if Webjet were to survive, it would need to be the seasoned banker’s maiden “virtual deal” in a 40-odd year career.

From his office in the side of a mountain opposite Queenstown’s Coronet Peak – popular with skiers and mountain bikers – and in mandatory self-isolation, he was furiously working on Plan B.

It was clear from the daily 6pm (Sydney time) syndicate phone calls that the equity raising would not be a clean strike. $100 million wasn’t enough to keep the lights on for 12 months, let alone to be well capitalised when conditions improved. So, in parallel with the equity proposals, and advised by Goldman Sachs, the chairman spearheaded talks with private equity firms, who were offering to help recapitalise the company.

The all day and all night talks focused on convertible note type proposals from US firms KKR, dubbed "Stephanie" and advised by UBS, and Bain Capital or "Bolt" because it was much later to the scene and had to move quickly.

Either would have funded Webjet through to the other side of the pandemic, but would have been costly for shareholders in terms of dilution. For Webjet's board, it was a classic corporate finance conundrum; go with a debt structure that dramatically improved future earnings per share or an equity structure that couldn't match the EPS metrics but meant all involved could sleep at night.

Sharp says he was clear to both PE firms that the board wanted to give shareholders first (and as it turns out the final) chance to chip in to save the company. Amid the chaos, Sharp and Guscic were talking every half hour, there were 100s of calls with investors, Zoom chats with other private equity types and the like. CFO Ristevski was doing his best to get covenant releases from Webjet’s lenders HSBC, National Australia Bank, and ANZ.

All the pieces came together on day 17. It was April fools day and Webjet’s board met to review its final options and make a decision. Of course, it was no ordinary board meeting. Chairman Sharp hosted the phone hook-up from self-isolation in Queenstown. Not even the travel company’s board could travel.

All directors were well aware of the company’s need to secure capital. They had been kept up to date on the rollercoaster ride of getting three deals – two private equity proposals and an underwritten equity package. There was plenty of talk about shareholder dilution and capital structures under the various scenarios, using models put together by Goldman Sachs.

The brokers, having been given one last chance when they were told private equity was very much alive and keen, were able to knock together an underwritten deal that would guarantee Webjet at least $275 million at $1.70.

Investor sentiment had warmed, no doubt helped by a baby bull market rally as governments in Australia and offshore unveiled massive stimulus packages aimed at nursing the economy through the pandemic. And, in nothing short of a mini-miracle, the ASX made a snap change to its closely guarded listing rules to allow cash strapped companies like Webjet to issue more shares to institutional investors. It made the deal more palatable for underwriters.

The deal was at $1.70 a share – a hair raising 60 odd percent discount to its most recent close. It was also about one-tenth of what Webjet’s chairman thought his company's shares were worth at the start of the year. But it was equity, it was underwritten and it was supported by major shareholders including Australian fund manager First Sentier. And it was big enough to buy a 12-month lifeline.

Of course, securing the capital also came at a considerable cost, including a widespread cost-cutting plan. CEO Guscic gave up 60 percent of his salary and his bonus for the 2020 financial year, 440 staff were made redundant (out of about 2200), while colleagues still employed were put on four-day working weeks. Capital expenditure was delayed and all other non-essential spendings were frozen.

For all intents and purposes, the company was saved – but there was still room for one more twist. Bain Capital, whose convertible note offer was spurned, made a late bid for shares in Webjet’s equity raising and matched it with an offer to sub-underwrite part of the company's entitlement offer. (KKR didn't see value in a minority equity stake).

Webjet accepted the bid – and upsized the raising to $346 million. It will have to issue about 203 million new shares, resulting in huge dilution for shareholders. (The company had 135 million shares issued at the end of last financial year).

In any other deal, Bain Capital's late entrance may have been the punchline. But Webjet's deal was not just another deal. It was a hero to zero story – and back – in the space of six weeks.