Amp Would Be Smart To Dump The Virgin

Sydney Morning Herald

Wednesday October 23, 2002

Elizabeth Knight

Just when the rumours that the AMP was looking to leave its UK joint venture with Richard Branson's Virgin began in earnest, along comes an article from the UK that Branson plans to extend the joint venture and issue credit cards around the world.

Both rumours can't be right. And the smart money would be betting on an exit strategy ahead of the expansion strategy.

It could be that Branson has expansion in mind. But it's difficult to see the new tough minded and much less egotistical AMP under Andew Mohl indulging this business too much longer. It was yet another successful attempt by Richard Branson to sell his Virgin brand name to another ego-driven chief executive for a large amount of money.

In this instance, it was the infamous George Trumbull, a brash American otherwise memorable for losing several billion on the takeover of the GIO, for insulting John Howard and for getting sacked and paid off $13.2 million.

He began this joint venture with Virgin, which delivered Branson a windfall of some $200 million.

Although bits of this joint venture scraped into the black, the whole thing has never actually made any money in the four years that it's been running.

The mortgage business was sold to the Royal Bank of Scotland, another partner in this part of the business.

Virgin Money and Virgin Direct they did online financial services and pensions and life insurance are still around.

But it's difficult to imagine Mohl putting more money into this venture to enable it to issue credit cards in the US.

Mohl's recent predecessor, Paul Batchelor, looked at floating the online part when the dotcom boom was in full swing but missed the boat.

The new AMP management would probably love to sell this business and the extent to which it has this option depends on the joint venture arrangements between it and Branson.

According to the UK report, Virgin is interested in the US and Australia to push this credit card because it already has a presence in these countries. In the US it operates 22 Megastores and has launched Virgin Mobile. Virgin Atlantic also flies into major US cities.

There has been much talk about whether this joint venture will break even some time soon. A Virgin spokesman reportedly made the following classic comment: ``We are heading for break-even. If we decided to stop growing the company then we would reach profitability quickly".

It's got a real dotcom or junior telecom feel about it. For AMP to dump it would not be meaningful financially but it would tell the market that Mohl was fair dinkum.

There are times when a particular company just gets lucky and the whole world changes for the better.

In September last year this happened to Qantas. Its effective duopoly was transformed into a near monopoly overnight when domestic arch-rival Ansett fell over.

Brokers are now moving their earnings before interest and tax estimates up to $1 billion plus for this year. This is an extraordinary feat for any airline, least of all an Australian airline.

And on a smaller scale, the same kind of luck has struck our home-grown biotech success, Cochlear.

It had a major rival that equally shared the major US market but which recently got bowled over by a large scare about meningitis and the recipients of its implants.

As a result, Advanced Bionics Corp, which had a design fault in its product identified by the FDA, handed US and worldwide dominance of the ear implant market to Cochlear.

Advanced Bionics made a mistake and Cochlear was there to capitalise.

It would be unfair to suggest that Cochlear did nothing to deserve this good fortune.

This is one of Australia's most impressive exports. It now has 70 per cent market share internationally, has been well run and has much to be proud of.

But fate has handed it a very good hand.

The retiring chairman David Penington announced at yesterday's annual meeting that, in the current half, profit would improve by some 40 per cent and it was possible that the full year would improve by the same amount.

This has been an extraordinary year. However, longer term, he sticks to profit growth forecasts of about half this much. CSL therefore probably represents this country's purest growth stock.

All this from a company that is renowned for underplaying the upside.

Not suprisingly, the stock price went wild yesterday, surging more than 11 per cent.

© 2002 Sydney Morning Herald

Back to News Index | Back to Home