Branson: Behind the Mask (23 page)

Back in the UK, and dressed in a Newcastle United football shirt, Branson arrived at the bank’s headquarters to repeat his promise to neither close branches nor dismiss any staff. Virgin, he told his audience, planned to double the number of customers from four million to eight million (the numbers kept changing) and to triple the number of branches. ‘Our customers’, he said, ‘showed that they trusted the Virgin brand to the extent
they would stop withdrawing money on the basis that Virgin would buy it.’ In reality, the withdrawals had stopped within hours of the government promising in 2009 to protect all deposits and loans. He also pledged that Virgin Money would offer free banking to those with current accounts, which would be introduced ‘by 2013’. With pride, he boasted that the bank was worth £1 billion, a quarter more than he had paid four weeks earlier. Boasting about windfall profits at the taxpayers’ expense seemed to contradict his sermon advocating the alternative to ‘business as usual’.

The reality was unveiled one month after he had attacked banks in New York for ‘ripping off’ their customers. Virgin Money announced charges on current accounts which had previously been free, and declared that the interest rates for 25,000 credit-card customers judged to be ‘risky’ would rise by 50 per cent. How much Branson knew about those changes was uncertain. In
Screw
Business,
he had criticised pure profiteering by the banking community for ‘wrecking our planet’. He continued, ‘We can’t charge one group of customers more than another or less than another. We can’t find a way to tack on a hidden charge … Why? Because none of those things make everyone better off.’ To some, Virgin Money appeared to be no different from other building societies, except that, in this case, British taxpayers, on Branson’s own account, had lost out to a tax exile.

The blowback of Branson’s triumphalism provoked a
Guardian
writer to suggest that ‘Virgin is built on the back of taxpayer subsidies.’ The company’s profits, he wrote, depended upon ‘operating heavily protected businesses’. Among the examples managed by Virgin itself were the company’s airlines, Virgin Trains, Virgin Care and now Virgin Money. All were dependent on protection by government regulations, government contracts or the provision of taxpayers’ money. Together they amounted to over 80 per cent of Virgin’s revenues.

‘This is of course complete garbage,’ replied Branson the following day. ‘Ninety-nine per cent of our businesses have nothing to do with government at all and have been built in the face of ferocious competition.’ The
Guardian
’s
allegation, he continued, is ‘an insult to our 50,000 wonderful staff’. He claimed that Virgin Trains was not dependent on the state. ‘Far from receiving subsidies, we now pay more than £100 million a year to the taxpayer’ – a comment which was somewhat difficult to reconcile with the fact that Virgin Trains was receiving more than £100 million in profits and subsidies from a government franchise.

The more profound weakness went unmentioned in Branson’s reply: the absence of a coherent strategy at Virgin Money to guarantee success. In Branson’s mind, the merger of Virgin Money with Northern Rock was accomplished by replacing the signs on the high street. Both he and Gadhia heralded Virgin’s banking revolution, but neither fully understood the enormity of removing what the industry called ‘the legacy products’ or ‘the platform’ from Northern Rock. To modernise Northern Rock’s technology, its staff and the branches was complex. Merging it with Virgin Money under a single ethos was challenging. Gadhia had not yet mastered the detail of creating a bank to offer customers current accounts and banking cards. She lacked personal experience of the design of modern banking emporiums. Her expertise lay in paying commission to brokers for selling mortgages and insurance. The result was that one year after the purchase, Virgin Money’s branches still resembled historic edifices. The four new Virgin Money Lounges scattered around Britain were small and appeared to be deserted. Other than pledging to offer current accounts by the end of 2013, Gadhia had not produced profitable results from a convincing strategy.

The truth about Virgin Money was portrayed after Santander abandoned the £1.65 billion purchase of 316 RBS branches.
Santander’s explanation was the incompatibility of the two banks’ IT systems. Even for a banking giant, the cost of solving this would dwarf any potential profits. Within hours of the announcement, Virgin’s publicists encouraged newspapers to report that ‘Virgin Money pounces on RBS branches’. Reflecting Branson’s bravado, Virgin Money was characterised as ‘the most credible competitive threat to Britain’s big banks’. Previously, Branson had offered less than £400 million for the branches but, given another chance, he slunk away. Virgin Money was still a building society, not a bank.

In the background, Branson knew, Wilbur Ross was waiting for Virgin Money to be floated so he could collect his profits. Branson spoke about a £2 billion sale – an ambitious target with Virgin Money struggling to break out of a financial straitjacket. Branson was searching for other sources of income. As usual, the most attractive was taxpayers’ money.

‘That’s music to our ears,’ said a Virgin executive after hearing Tony Blair announce in 2003 that the NHS would buy services from private hospitals. Private contractors would be guaranteed earnings from the NHS’s annual £100 billion budget. For Virgin, profiting from the NHS appeared to be similar to the millions of pounds the company received from British taxpayers for running Virgin Trains.

Virgin had already researched the health market. Three years earlier, Branson had been asked by Alan Milburn, the secretary of state for health, to report on how hospitals could improve their food, care and cleanliness. In Milburn’s words, the ‘award-winning Virgin Group’, renowned for its customer services, was best suited to advise the government. The report, ‘Customer Service in the NHS’, was written by two Virgin Atlantic employees and a consultant. In unpublished appendices, the authors strayed from the simplicities of ‘care’ to recommending that the government consider privatising parts of the NHS, establishing specialist units, changing NHS contracts and salaries, creating competition by encouraging private health companies to bid for contracts, and encouraging ‘entrepreneurial’ GPs to create polyclinics to offer services to the local community.

Three years later, the Labour government’s reorganisation of the NHS included some of Virgin’s recommendations in a scenario outlined by Lord Ara Darzi, a renowned surgeon. GP practices, Darzi believed, were inefficient. Even if seven GPs were grouped together in a community centre, their isolation
from other medical services wasted money. His solution was polyclinics established by private companies under contract to the NHS to provide a range of services. GPs, agreed Tony Blair, should turn themselves into private businesses with a guaranteed income by providing services to the local primary-care trusts.

Guaranteed income from the state appealed to Virgin’s directors. Private medical providers already sold surgical services to NHS hospitals, but Stephen Murphy eschewed what he called the ‘blood and blade business’. Community services were more appealing. Together with Gordon McCallum and Virgin Trains chief Patrick McCall, he searched for an expert to design Virgin’s ‘market-entry strategy’. One model had been developed in South Africa by Netcare. Mark Adams, Netcare’s chief executive in Britain, was called by McCallum to discuss the creation of Virgin clinics. Over eighteen months, Adams discussed the approach Virgin should take with GPs, a conservative branch of a truculent profession. Virgin’s success would depend on securing their support, since they would co-operate only on their own terms.

To position Virgin without offending political sensitivities, McCallum commissioned Goodstuff, a market-research consultancy, to plan a strategy. The consultants summarised their overall purpose as ‘engendering general warmth to avoid negative press/sentiment’. Their report, which was codenamed ‘Project Cocktail’, described, with the help of advertisers and specialists in ‘healthcare communication’, the approach and allies Virgin would need in order to avoid suspicions that the company’s involvement in health was ‘only for the money’.

That prejudice could be dismissed, Goodstuff suggested, by deploying Branson: ‘With Richard as the face of Virgin, consumers believe he aims to put the consumer first.’ There was no mention of how Virgin could improve healthcare. Rather, Goodstuff focused on the salesmanship necessary to make Virgin acceptable. ‘Putting the consumer at the heart of healthcare’,
recommended the report, would reflect ‘Virgin’s holistic offering’ of ‘always putting the customer first’.

The absence of any medical expertise troubled the agency. Virgin’s airlines and trains were not relevant. Slightly more helpful was Virgin Active, the fitness chain labelled by Goodstuff as a ‘venture into well-being’, taking a cue from Stephen Murphy’s belief that ‘Virgin is very interested in health and Wellness.’ Sifting through Virgin Money’s website, the consultants discovered the sale of an insurance policy called ‘Cancer Cover’, but they were uncertain whether profiteering from the illness would attract criticism. The best self-advertisement should have been the stem-cell banking services established with Christopher Evans back in 2007. Branson had hailed the venture as Virgin’s response to ‘distraught parents’ and doctors. But it was doctors and the NHS who rejected his service. He relocated the freezers to Qatar. Within the first two years, the company lost £1.7 million on a turnover of £220,000; and in 2011, turnover fell to £138,000. The annual losses were £404,000. Virgin’s investment was depleted.

Ultimately, Goodstuff acknowledged the absence of any pedigree to justify Virgin’s entry into the health business. The rationalisation would rely entirely on Branson’s image. Doctors and patients, suggested Goodstuff, could be seduced by ‘an emotive promise of Virginess’ encapsulating ‘Virgin’s values and service that reflects modern life’. ‘Virginess’ would be explained by publishing the ‘Virgin Pledge for Patients’, under the striking headline: ‘Virgin will be working with the medical professionals to make healthcare better for both medical practitioners and their patients.’

The pertinent issue was Virgin’s intention to maximise its profits. Under the government’s rules, each clinic was assigned a quota of patients. The finesse, recommended Goodstuff, was to fill the quota with patients who did not visit GPs. Accordingly,
Virgin should be cautious about admitting ‘the 55–65-year-olds who seek advice (perhaps too) regularly from their friendly GP’, and be wary of women aged thirty-five to forty-five with children. The most welcome, reported Goodstuff, were young male professionals who ‘are the most lucrative to recruit – they help fill a quota without putting a great strain on resources’.

With that brief, McCallum offered Adams a budget of £300 million to develop clinics in eighteen towns. ‘Richard wants about twenty Virgin clinics over five years,’ he told him. Attracted to Virgin’s success in ‘shaking up old industries’, Adams accepted.

Adams’s target was GPs who, after their fortieth birthday, he believed, lost their altruism and tempered their frustration by playing golf. Ideally, he was looking for middle-aged GPs who wanted to become wealthy businessmen by encouraging their patients to buy private treatment from Virgin to cure obesity, diabetes and alcoholism.

McCallum’s interest was not only commercial. ‘Holly’s doing medicine, let’s use that,’ he told Adams. After studying medicine for five years, Branson’s twenty-six-year-old daughter had deferred her second year of training at Chelsea and Westminster Hospital to join her father. She would not return to the hospital. Branson wanted his daughter to become involved in the management of his empire, believing that ‘Virgin would definitely benefit if Holly was willing to be more of a face of it.’ Virgin Care was ideal for his daughter, he thought. Fearing the erosion of the brand’s youthful image, he was equally keen that Sam, his son, should also join the family business.

In January 2007, Adams and his team of NHS experts recruited from leading London hospitals began a three-month national tour. Invitations were sent to over 3,000 doctors in twenty-six towns to attend a three-hour session designed, said McCallum, to ‘win their hearts and minds’. Holly was expected to accompany Richard McMahon, Virgin’s new health supremo.

The first session introduced by Adams at the London Planetarium began soberly until he showed photographs of Virgin doctors wearing red uniforms. The audience became restless and the session slid towards farce after Adams introduced a message from Branson. The chairman’s face appeared on the ceiling. His oration urged the assembled doctors below to save mankind – a calling, he said, which was shared by himself and the Virgin family. ‘We can have a fantastic future together,’ the God-like recording concluded. Before the finish, Adams realised that his congregation had lost interest. The only excitement was shown by the NHS’s civil servants. A few weeks later, they flocked at Virgin’s expense to the company’s new headquarters in Swindon for a party.

The script was rewritten for the first meeting outside London. About a hundred GPs and protesters organised by Unite, the trade union, disrupted the meeting, but peace was restored once Adams assured the audience that Virgin did not intend to replace doctors’ clinical authority but merely help their organisation. Among Virgin’s attractions, he explained, was humour. Envelopes containing information about sexual diseases would be marked ‘Not for Virgins’ and those referring to testicular illnesses would be marked ‘Always Mind the Bollocks’. GPs would work for the NHS but would receive 10 per cent of the profits if their patients used Virgin’s private services located in the same building, including dentists, therapists and eye surgeons offering laser treatment. As the road tour progressed, Adams became more confident, although Holly – apparently uninterested – had disappeared. By the end, about 200 doctors agreed to join a Virgin polyclinic.

While Adams planned to open the first clinics, McCallum was having second thoughts. Virgin could not afford to guarantee paying the doctors any profits while Virgin Atlantic was losing money. Launching Virgin Care, McCallum decided, was too
difficult. The headquarters in Swindon was suddenly closed and Adams and his team were paid off. The plans for Virgin’s clinics were abandoned. Adams blamed ‘wild optimism’ for the failure, while Virgin blamed the NHS trust in Swindon.

Branson had not lost interest, however. Any assured income from the government was attractive. In Virgin’s headquarters, Gaurav Batra, another of Branson’s fortune-hunters, knew the importance of finding new opportunities and, in the fall-out from the financial crisis, he heard that Assura Medical was for sale. Buying the company, Batra knew, offered a special advantage: involving Holly Branson in the family business – and preferably in healthcare – was a priority for her father.

In 2005, Assura was a property fund managed by Richard Burrell. That year, like Gordon McCallum, Burrell spotted the potential profits offered by Labour’s privatisation of GP services. The medicine did not interest Burrell. Instead, he bought the properties used by GPs for their surgeries and rented them back to the doctors. But in 2006, encouraged by the government’s promise of contracts for primary-care trusts offering ‘integrated’ services to hospitals, he plunged deeper into healthcare. The government’s formula was for GPs to form commercial groups and offer their services to the NHS. Burrell signed joint partnerships with about thirty GPs’ surgeries employing 350 doctors and serving three million patients. Assura Medical was established in 2008, and Burrell planned to attach pharmacies and other private services to each practice. But despite the government’s edict, individual NHS administrators opposed to the policy refused to co-operate with Assura’s GPs, and Assura’s debts rose to £4.4 million. In the midst of the financial crash, the company’s directors lost confidence in Burrell’s forecasts. ‘There’s no evidence that it’s a growth market,’ said one. ‘The only growth in the NHS is confusion. Mixing private capital with public policy is tricky. The government doesn’t know where it wants to go and
doctors are too political. Partnerships with doctors is one step too far.’ In January 2009, the board decided to sell the medical business.

‘I hear you’re for sale,’ Batra told Burrell. ‘We’d like to look at you. We cocked it up the first time round. We stubbed our toe with Mark Adams by going after the wrong business model, but we want to get into the health business.’

The first visit by Batra, McCallum and Holly Branson was to Reading. Assura, the Virgin team realised, had laid the foundations for a business suitable for Holly to develop. In a buyer’s market, Virgin would offer a low price. After Burrell returned to London, the negotiations between Batra and the deputy managers would be helped during their journey across Britain by Batra’s suggestion to two Assura directors that their contracts would continue if Virgin bought the business. The only person showing no obvious interest in the discussions, the Assura team noticed, was Holly Branson. ‘She didn’t ask a single difficult question,’ said one director.

McCallum invited Burrell and his two senior directors to discuss the sale at a Virgin board meeting on 16 October 2009 in Geneva. The Virgin team all flew from London to meet the Assura management, who also flew from the capital. The inconvenient logistics, the Assura team assumed, were to satisfy Branson’s tax arrangements.

‘We’re not really sure that we want to buy your company,’ said McCallum, ‘but let’s see what you’ve got.’

The deflating opening remarks destabilised the visitors. The PowerPoint presentation predicted that Assura was poised to capture £100 million in revenues by 2012, rising eventually to £1.2 billion. The profit margin was a hefty 20 per cent. McCallum could quietly giggle. This was a fire sale of a good business, and Vivienne McVey, Assura’s deputy director, was urging Virgin to buy it. McCallum offered £7.5 million for a 75
per cent stake. To finance the purchase, he expected Assura to lend £4 million to Virgin. The loan would be repaid only after Virgin Care became profitable.

‘That’s derisory,’ commented one director. ‘Virgin are playing dirty here,’ he protested to the fund manager of Invesco Perpetual, an investor. ‘We should get a higher price.’

‘Even if the offer’s too low,’ the fund manager replied, ‘it’s the market price. We accept.’

Virgin appeared to have secured a bargain and, to reduce the price further, it sold off the pharmacies for £3.5 million. The ultimate owner of Virgin Care Ltd was a holding company registered in the Virgin Islands. McVey, appointed as Virgin Care’s new managing director, pledged that the company would provide better care at lower cost. Virgin, said Branson, would be ‘working alongside our NHS partners’. In
Screw
Business
as
Usual
he wrote that health ‘fits perfectly with our focus on doing good to do well’.

Within a year, Virgin realised that Assura’s business was unprofitable. Without the promised bonuses, most GPs complained that their relationship with Virgin was ‘not going anywhere’. Doctors suggested that their partnerships were being ‘taken over by stealth by Virgin’, and that once in control, as one doctor discovered, ‘Virgin got rid of the GPs because they thought they could do better than us.’ At the Virgin clinic in Surrey, doctors were replaced by locums. Virgin’s costs fell, while patients complained about the disruption of their treatment. At the Health and Wellness Centre in Liverpool and the Birkenhead Medical Centre in the Wirral, the qualifications of the specialists hired by Virgin were questionable. Biopsies of suspected skin cancers sent to the Sefton dermatology unit in Southport were either mislabelled or incompetently excised, and patients discovered that Virgin was employing an unregistered German locum there. Civil servants at the Department of Health
dismissed the grievances as trivial. Their priority was to attract more private companies, and Virgin’s managers were uttering soothing reassurances.