Branson: Behind the Mask (22 page)

For Walsh, the battle was personal. Recalling the harm inflicted on BA by Branson’s successful libel writ in 1993, he anticipated his own triumph with relish. ‘I don’t get on at all with him,’ he said. ‘I don’t think I’m expected to. I’ve made no secret of the fact I don’t think he likes me either.’ Others in London shared that opinion but had no opportunity to voice their sentiments. They had secretly been pleased by Virgin Atlantic’s embarrassment when an employee was exposed for selling confidential information about celebrity passengers arriving at Heathrow to the Big Pictures photo agency. They recalled that in 1993, Branson won his libel action against BA by denying Virgin had financial problems. His enemies did not fail to notice the irony when it subsequently appeared that the company was facing difficulties. Those critics applauded Walsh for adding, ‘I don’t see any value in the Virgin brand. It’s not a global brand.’

Branson hated criticism. He also hated losing – especially to people like Walsh. His reaction to any humiliation followed a familiar pattern. First came the bluster. BA’s purchase of BMI, he protested, would harm consumers. ‘The only reason that British Airways have offered to write out this massive cheque for this massive loss-making company is to stop Virgin Atlantic doing it – so it is purely an anti-competitive move.’ Then came the appeal of last resort.

Throughout his career, when faced with commercial defeat, Branson appealed to regulators. In bidding for radio and TV franchises, the national lottery, his various airlines, trains and the use of renewable fuels, Virgin’s success had depended upon the regulators’ help. Posing as the people’s champion, he expected a government to rescue Virgin, the righteous underdog. ‘We will challenge every aspect of this process,’ Branson now said, ‘which if allowed to stand will undoubtedly damage the British airline industry for years to come.’ He demanded that government regulators ignore market values, block the deal and favour him, ‘in the consumers’ interest’. After his appeals was rejected in London, he complained to the EU in Brussels. Without BMI, he said, flights from London to Glasgow, Aberdeen and Edinburgh would become a BA monopoly. He described how the airline had increased the fares between Glasgow and Heathrow by 34 per cent during the six months since BMI had pulled out. That, said Branson, confirmed the danger of monopolies. ‘Competition regulation should protect the customer from monopoly situations where companies can set whatever prices they like and stop investing in their product.’ The deal, he said, would ‘screw the travelling public’. One hundred BMI employees at Belfast airport cheered Branson. Many were convinced he would save their jobs.

In March 2012, BA’s purchase of BMI was approved by the regulator. ‘The decision is a travesty, just unbelievable,’ said
Branson. ‘You just wonder whoever’s working in the competition authority, whether they realised which department they were walking into the morning they made that decision.’

‘Whatever he says’, replied Walsh in celebration, ‘is largely irrelevant as we have the approval and we’re not in any way going to be distracted by anything Branson says.’ He added, ‘I don’t see him as someone who deserves my admiration. Other people have done more in the airline industry. I’m not one of his admirers.’

The regulator’s approval was subject to BA selling twelve pairs of slots at Heathrow. Seven would be awarded to an airline flying between Heathrow and Scotland. Branson said that Virgin Atlantic would bid for all twelve slots. He wanted to fly the profitable routes to Cairo, Riyadh, Nice and Moscow. The unprofitable flights to Scotland were less attractive. He had often spoken about Virgin Trains ‘wiping the floor’ with the operators of the domestic airline routes. Not only were the trains cheaper and faster but, as his spokesmen had often repeated, flights from Manchester to London emitted five times more carbon. Now the environmental argument was junked, as Virgin Atlantic needed transit passengers. Virgin, Branson announced, would replace BMI’s flights to Manchester. Walsh seized on another chance to embarrass his foe. ‘I would expect Virgin to honour the commitments they have made’, he said, ‘and fly to Scotland. They now have the ideal opportunity.’ To Branson’s misfortune, the regulators were weary of the special pleading from a company that had confessed to its involvement in a cartel.

Virgin was, however, given permission to fly on the loss-making routes to Scotland, but easyJet was awarded the profitable route to Moscow. Branson’s back was against the wall. Isolated, he was now compelled to search for an alliance – or an outright sale. In May 2011, he admitted that he was in talks with ‘two or three’ airlines. ‘Within the next two or three months we
should be clear whether there’s an alliance we’re happy with or not,’ Branson said in Chicago. ‘If it means selling shares, I’ll consider that. My principal interest is in an alliance.’ His potential partners were Air France and Delta. His contemplation of the sale of his own 51 per cent stake signalled an unexpected twist in his fortunes.

The day before Branson implied that he had no cash to buy BMI, he announced Virgin Money’s intention to buy 632 branches of Lloyds Bank. ‘This can happen quickly and smoothly,’ he said in May 2011, on behalf of a company back under his control. ‘We’re a serious bidder and can give the government what it wants through tough competition.’ He would need to borrow about £3 billion ($4.87 billion). This was the sort of bargain that Stephen Murphy and Branson had expected the economic crisis to throw up: namely, a good business teetering towards bankruptcy.

The sale of the 632 branches arose in the aftermath of the banking meltdown. In 2008, Lloyds had been encouraged by Gordon Brown to rescue HBOS from insolvency. The result was that Lloyds, a previously sound bank, was decimated by huge debt and its shares lost over 90 per cent in value. Two years later, the regulators ordered both banks to sell branches in order to improve competition on the high street.

Banking’s profits attracted Branson, but his ambitions had been frustrated. In early 2010, the Royal Bank of Scotland (RBS) had offered to sell 316 high-street branches for a minimum of £1.3 billion. To avoid one of the hurdles raised during the failed bid for Northern Rock, Virgin Money had obtained a banking licence by purchasing the Church House Trust for £12.28 million. The obscure private bank, founded in 1792, had no branches and fewer than three thousand customers, and its pre-tax profits in 2008 were £450,000. After Virgin Money invested
£37.3 million into the trust, Jayne-Anne Gadhia said that the bank would offer current and fixed-term savings accounts ‘by the end of this year’. Gadhia did not have a background as a banker and was always likely to struggle in establishing the complicated machinery. Her forecast did not materialise.

Gadhia now hoped to transform Virgin Money into a proper bank through the purchase of RBS’s branches. After the FSA, the government regulator, approved Virgin Money’s bid, Branson persuaded Wilbur Ross to pledge $152 million for a 21 per cent stake in the prospective company. On any reckoning, Ross was investing in a dream. Virgin Money did not rank highly among hundreds of competing fund managers, was known only for offering credit cards and mortgages, and had no surplus money. Branson offered less than £400 million for RBS’s 316 branches and promised ‘to save jobs’. RBS rejected his bid, accepting instead Santander’s offer of £1.65 billion.

Buying the Lloyds branches was Branson’s next opportunity, but soon after expressing his interest, he was asked to show that he could raise £3 billion. He retreated without bidding. Unwilling to scale back his ambitions, he would need to change his tactics.

The limitations identified by Rowan Gormley had resurfaced. Branson lacked the expertise and money to create a Virgin bank. Unlike Vernon Hill, the American who had introduced Metro Bank in London in 2010, neither Branson nor Gadhia had a clear-cut, futuristic strategy. Successful banking depended upon faultless computer technology and specialist staff. Based on a perfected model, Metro Bank intended to open 200 branches across Britain by 2016, dependent on training sufficient staff to sustain Metro’s culture. Gadhia lacked the experience to start a similar bank. Surrounded by loyalists, she disliked critics and had not recruited banking experts. Like Branson, she preferred to shine by reviving familiar ideas.

In July 2010, Branson had returned to Sydney – again with a grin and a blonde – to relaunch low-cost Virgin Money credit cards and low-interest loans. ‘We’ve come to Australia to give the banks a run for their money,’ he repeated. ‘Virgin loves coming in where people are being ripped off and there’s no question that people are being ripped off in the banking sector, and in every single product that we’re launching we’re much, much better value.’ Four years earlier, he had acrimoniously divorced Virgin from Westpac after attracting only 6 per cent of the market. He had blamed the collapse on Westpac poaching Virgin customers, but that explanation appeared to be bluster. The business was later reported to have closed after the auditor raised issues about its financial security.

Since that collapse, Australia’s nine banks had consolidated into what Branson called a ‘cosy oligopoly’. ‘There isn’t a lot of competition,’ he said, ‘and the banks are making a lot of money.’ Targeting the 84 per cent of Australians who had never bought life insurance, Virgin needed a partner since the company was not licensed to accept deposits or operate as a bank. Citibank’s executives were persuaded to provide the money and administration to sell Virgin’s investment products, believing that the Virgin brand would attract young investors. The lure was promises of lower interest rates, discounts and free tickets on Virgin airlines. Three years later, Virgin Money had attracted no more than 90,000 active customers. Potential customers were resistant even to Virgin’s advertising campaign. Despite his repeated claims of success, the business lost money every year until Branson quit.

Hype rather than substance characterised his ambitions. His best hope now was to buy the discards of Britain’s banking collapse. The remaining prize was Northern Rock. His fate depended upon the British government.

In 2010, Labour faced certain defeat in the general election. Unconcerned by Gordon Brown’s distress, Branson switched
his support to the Tories and urged his new allies to tackle Labour’s £178 billion deficit with immediate spending cuts. ‘It would be dangerous’, said Branson, ‘if we lost the confidence of the markets through delayed action. We’re going to have to cut our spending.’ The Tories were delighted that wooing Branson had paid off. His support, said the then shadow chancellor, George Osborne, was ‘hugely welcome. As Britain’s best-known entrepreneur, he knows more about creating jobs and building an economic recovery than the entire Labour Cabinet put together.’ In private, Osborne was sceptical about Branson but he would not voice any public doubts about Britain’s most popular businessman.

Branson was not surprised by the Tories’ gush but he did not anticipate any profound relationship, just a continuation of the stand-off. The sympathy of British politicians was essential to his commercial survival, and he expected their silence over his legitimate tax-avoidance schemes. Nothing would be said, he expected, about the recent relocation from London to Geneva of the Virgin company responsible for licensing the Virgin brand. In 2009/10, Virgin Group Holdings had paid £10.1 million taxes on revenues of £32.4 million, and still owed £26.9 million in corporation tax. By moving to Switzerland, Branson reduced the company’s future taxes. To satisfy the Inland Revenue’s conditions, Stephen Murphy had personally relocated to Geneva to prove that Virgin’s management was taking all its decisions offshore. Simultaneously, to remove any trace of his domicile or residency in Britain, Branson transferred ownership of his home in Kidlington to his two children. For the same reason, his second Holland Park home had been sold, although he justified it by writing, ‘I came to the conclusion that I didn’t need such a large base in London.’ The completion of Branson’s tax exile passed without comment in Westminster. Too much was at stake on both sides to disrupt the truce.

Soon after the election and the Conservative-led coalition government was formed, one of Branson’s advisers had heard about the secret agreement between the Labour government and the EU Commission that the sale of Northern Rock would have to be completed before December 2013. George Osborne, the new chancellor of the exchequer, decided to advance the sale to 2011. Bids were invited for the bank’s savings and mortgage business, which controlled £21 billion and had a million customers and seventy-five branches. The government’s price of about £1.5 billion excluded the ‘bad’ bank with mortgage loans of £54 billion, which the government planned to discharge separately at no loss to the taxpayer.

The political sensitivities were considerable. Osborne needed to avoid the impression that Northern Rock would be sold cheap or that he would allow the purchaser to earn easy profits. The risks would be particularly high if the buyer was Branson.

To avoid the criticism voiced of him two years earlier, Branson entrusted the negotiations to Jayne-Anne Gadhia. During the ensuing period, she had become a familiar visitor at the Treasury and its agencies, calling regularly to judge the mood and win the officials’ trust. Everyone, she knew, needed to be persuaded that Branson was not involved in the management of Virgin Money. With him excluded, she assured the officials there would be no repeat of Virgin seeking to renegotiate the price after a ‘handshake agreement’. The public, however, would be unaware of Branson’s exclusion as all the announcements were made in his name.

To establish Virgin Money’s trustworthiness, Virgin’s publicists announced that Branson had promised not to fire any of the 2,100 staff and to protect all the branches. For the Treasury, that was a compelling scenario. Gadhia paraded Virgin’s additional credentials, focusing on the appointment of Brian Pitman, a retired banker, as chairman. ‘Even at seventy-five,’ Branson said,
‘he is exactly the cool-headed, strategic banker that the situation demands.’ However, during the negotiations with the government, Pitman died. His replacement was David Clementi, a former deputy governor of the Bank of England and completely trusted by the Treasury. The heavyweight investor was again Wilbur Ross.

Virgin’s opening bid in July 2011 was £1.17 billion, matching the government’s secret valuation. Soon after, Virgin discovered that American investment firm J. C. Flowers, the only rival, had bid considerably less and then withdrawn. To maintain the fiction of a competition, the government conceded ‘exclusive’ negotiating rights to Virgin. In October, the company reduced its bid to £800 million, blaming deteriorating economic conditions and a fall in bank share prices. After negotiations, Virgin’s final offer was £863 million, rising to £977 million if certain profit benchmarks were passed. With no other bidder, the government accepted. The taxpayer had lost £480 million, prompting Labour’s inevitable complaint that Branson had snatched a bargain. The government replied that Virgin was ‘the best available option to minimise future losses’. Branson had done well, although the financing displayed Virgin’s limitations. The cash price was £747 million plus other costs. Wilbur Ross gave £269 million, Stanhope Investments of Abu Dhabi invested £50 million, Northern Rock ‘lent’ Virgin Money £253 million in a convoluted asset purchase, and £150 million was borrowed. Virgin Money contributed just £50 million, and in return owned about 45 per cent of the institution. The sale was announced in November 2011. In Virgin’s first press release, Ross’s 45 per cent stake was not mentioned. Subsequently, Ross said that he intended to ‘sell out a few years down the road for 1.5 times book value’. In other words, he expected his investment to produce a notional 50 per cent profit.

The news coincided with Branson’s arrival in New York to
promote
Screw
Business
as
Usual,
the book which outlined his despair about the morality of capitalism. ‘My message is a simple one,’ he told invited journalists: ‘business as usual isn’t working. In fact it’s “business as usual” that’s wrecking our planet. We must change the way we do business.’

His message about Virgin ‘transforming itself into a force for good for people and the planet’ was directed at corporations. Instead of seeking profits, he told interviewers, corporations should be doing good for ‘humanity and the environment’. In Branson’s new ethics, there would be no casualties.

At the very moment Branson was preaching social responsibility in New York in 2011, David Baxby, the Australian chief executive of the Virgin Group, was relocating from Virgin’s headquarters in Geneva to Singapore – from one tax haven to another. Baxby praised ‘a very charismatic founder in Richard. He appeals to a lot of consumers that we’re aiming to target.’ While mentioning Virgin’s airlines, mobile telephones and financial services, Baxby revealed that Branson and the Virgin Group were withdrawing from direct management and wealth creation. In the future, he said, Virgin would offer the brand rather than expertise, money, management and a new product. At best, Branson was consolidating Virgin as a venture capitalist selling its label to innovators and risk-takers and avoiding the hard work.

Curiously, Branson’s new book focused praise on minuscule businesses. He identified a grocery, a clothing manufacturer and a producer of frozen organic meals and Cornish pasties. Implicitly, he disliked rival tycoons. After forty-five years, he recognised his weakness. The magic of the early era, when he had employed like-minded mavericks seeking fun and cash, had gradually been diluted, until finally the spell of creativity had evaporated. The pioneers’ replacements were traditional managers whose conservative accountancy suffocated risky originality.
The idol feared that his flame was dying, and
Screw
Business
as
Usual
was his latest intuitive attempt at renewal. Virgin needed to be redefined with a new sense of purpose. Implicitly, Branson admitted an inability to beat his rivals. Instead, he mocked them.

During those weeks promoting the book, Branson disparaged Steve Jobs – then still alive – as a ruthless executive. ‘That isn’t the way it should be done,’ he said about Jobs’s management of Apple. ‘An entrepreneur who treads over people to get to the top is rare. Too many business leaders are too quick to jump down people’s throats, or rule by fear, which is foolish. You should lead by praise – you can’t launch an idea if no one likes you.’

In New York, he told his audience about Northern Rock, ‘We’re sitting back trying to work out radical ways of running it differently than banks have been run in the past.’ As a new banker, he said, he would be offering small loans to the poor at advantageous rates. He appealed to his brethren in Wall Street to follow his example by no longer ‘ripping off their customers’ and asked them to ‘use their bonuses to repair the damage they have caused’.

‘The richest clown on earth,’ was a polite riposte from Wall Street. Corporate America was not minded to take lessons from Branson, but some executives were interested to watch whether he practised what he preached. Branson’s purchase of Northern Rock would be the test of Virgin’s new saintliness as his corporation aimed to fulfil, as he wrote in his book, his ultimate object of ‘a fairer distribution of wealth’.