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    That's the first gap to close...


    Rex owners up Virgin stake

    * Michael West
    * November 3, 2008 - 9:25AM

    The Singaporeans behind regional aviator Rex Airlines have quietly bought a strategic stake in Virgin Blue. They are lurking beneath the 5% disclosure threshold and had no comment when contacted by BusinessDay.

    Entities associated with Rex have soaked up around 3% of the carrier. Whether Kim Hai Lim and Thian Soo Lee can get their hands on the readies to make a full bid is an issue in itself. Rex's market cap is only $120 million and though its management runs a tight ship - costs are low and government lobbying high - a scrip bid would have little chance of getting off the ground.

    The move to soak up a few shares in Virgin is more likely strategic than a prelude to a bid although Virgin's bombed out share price and cash reserves could present a tasty asset strip.

    At balance date Virgin had $604 million in cash. It looks cheap versus its current market cap of $360 million - and the reason is cash burn.

    Thanks to a raging fuel price in the last half Virgin put its "average days cash reserves at 101" in its annual report.

    Jet fuel costs have since fallen though, along with the diving oil price, and now the formidable challenge is the economy. People just don't fly as much in a downturn and recent traffic figures suggest the malaise is starting to bite.

    The Virgin stock price - already under pressure from the economy and a "half-pregnant" strategy of venturing out of straight discount airline territory into international and business segments - was decimated by a barrage of selling when Toll Holdings flogged its 63% stake in the carrier to Toll shareholders via an in specie distribution in August.

    The three options for the Rex shareholders would be: one, get some cash from somewhere and launch a bid then merge the two operations; two, buy cheaply and make a turn on the investment and, three, pull off a bid, strip out the cash and wind up the jet leases and other assets to make a profit.

    Operationally, there is not so much in the way of synergies as a lack of overlap. It could work. Rex flies small regional routes and its fleet of turbo-prop SAABs would fit with Virgin's Embraers (a decent Brazilian jet) and its 737s.

    Funding would be the issue. Via its investment arm, Temasek, the Singapore Government already owns Singapore Airlines and has a stake in discount carrier Tiger. It would not covet Virgin so Temasek is unlikely to get involved.

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