Paul McIntyre: Branson's loss is a A$1bn gain

Sir Richard Branson might well have lost his fight to keep the Australian discount airline he started in 2000 - with just A$10 million ($10.8 million) - out of the hands of Patrick Corp boss Chris Corrigan but the maverick Brit has made a bucket-load on the way.

If Branson was to offload the 25.5 per cent stake he still holds in Virgin Blue, he would have turned A$10 million into more than A$1 billion in six years. Nice work.

All the noise coming out of the Virgin Group, however, is that Branson is in for the long haul, despite Corrigan's swoop.

Friday last week, of course, was the day Patrick's unconditional A$1.1 billion hostile takeover of Virgin Blue hit paydirt 10 weeks after it launched. After forking out A$260 million for 45.4 per cent of Virgin Blue two years ago, Patrick launched its unwelcome push in January for the rest of the company.

Although Corrigan has not said as much, it is widely accepted that all he really wanted was 50.1 per cent for board control. Corrigan, a wiley former investment banker, is of the view that Virgin Blue now needs more than an entrepreneurial bent to keep it in shape against its new discount rival, Qantas-owned Jetstar, which was launched in May last year and has had a big impact on Virgin's growth ambitions.

The tale is strikingly similar to when Optus was launched in Australia in the early 90s as the first rival to the Telstra monopoly. In its formative years, Optus was a nimble player that had Telstra ruffled. Today, it is a A$6 billion beast owned by Singaporeans and managed conservatively. Under Corrigan, we will see Virgin Blue go the same way.

At Patrick's AGM last month, Corrigan said this of Virgin: "We tended to have a model which was excellent for the times. We now have a completely different competitive environment and we need to make some changes to that model. We clearly underestimated the competitive threat that Jetstar brings and we need to urgently address that."

With his majority stake, Corrigan can do anything he likes.

Two years ago, Branson and his Virgin Blue co-founder and chief executive, Brett Godfrey, were hugely bullish about Virgin Blue capturing 50 per cent of Australia's domestic airline market after a very impressive first three years.

As part of those aggressive expansion plans, Virgin expanded its fleet from two planes in 2000 to 50 today. But Branson and Godfrey underestimated Qantas chief executive Geoff Dixon. He has publicly stated Qantas would allow a discount rival like Virgin about 30 per cent market share before it would be forced to counter. That happened nearly 12 months ago when Qantas launched Jetstar. Virgin's share has stalled at 33 per cent.

Jetstar's arrival has forced Virgin Blue into a price war in which tickets go for as low as A$1. Corrigan hates losing money. His push for management control is said to be partly a result of his belief in the need for a new Virgin Blue strategy.

A week ago, while Corrigan was holidaying in Europe, Patrick got to 50.26 per cent of Virgin Blue and, under Australian law, it had to extend its offer for another two weeks. As of Thursday, Patrick controlled 51.6 per cent.

The big worry now is that it could be forced to buy another 10 to 15 per cent of Virgin, which is held by opportunist hedge funds. They may cut their losses by April Fool's day, when Patrick's offer closes. The problem for Patrick is at A$1.90 a share, its offer is a mile higher than what analysts say Virgin Blue's stock is worth, particularly given that rocketing aviation fuel prices could wipe out nearly A$80 million, or two-thirds, of its 2005-06 net profit (already expected to be 15 per cent lower than last year's).

This week, Citigroup Smith Barney slashed its target price for Virgin from A$1.51 to A$1.24. With Patrick paying an unconditional A$1.90 a share, it looks like a hefty premium, but it comes down to how you rate Corrigan.

So far he's proven to be strategically sharp. With Virgin in his pocket, he has a A$4.3 billion business which covers rail, shipping ports and airlines. There is speculation he may move into trucking via a joint venture or takeover involving Toll Holdings.

Corrigan's big-picture view of transport means the concerns about his Virgin play could well be vapour. But Branson is not happy and may hang around to buy back his business if Corrigan's plans flop.