Sun, May 26, 2002 page11

• Branson's exploits hitting turbulence

  ENTREPRENEUR Recent efforts by the Virgin Group to acquire funding via share markets has set off alarm bells among analysts, who say the Branson empire may decline

  • NY TIMES NEWS SERVICE
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  In 1988, nearly two years after selling shares to the public in one of Britain's most hotly subscribed initial public offerings, the Virgin Group, the music and entertainment company founded by Richard Branson, was struggling.

  A looming recession had begun taking a toll on profits and the 1987 stock market crash had left Virgin shares trading at slightly more than half their offering price. So Branson, frustrated by what he deemed the shortsightedness of the public markets, took the company private again.

  

  Sir Richard Branson is trying to raise money in the stock market for at least eight of his businesses. But critics argue that Branson's zany publicity stunts mask a financial house of cards. Branson at his home in Oxfordshire, England.

  PHOTO: NY TIMES

  He has remained wary of the stock market ever since, shielding most of his businesses from public scrutiny in a web of offshore trusts that serve as holding companies for a US$5 billion empire that includes airlines, bridal gowns, soft drinks and financial services.

  "The delightful thing about not being a public company," he said recently, "is that we don't have to worry about foolish analysts who say stupid things."

  But despite such obvious disdain for the burdens of running public companies, Branson -- now Sir Richard, having been knighted in March 2000 -- is reversing course. He is planning to take as many as eight Virgin companies public, starting next year with Virgin Blue, an Australian budget airline.

  Since investors and analysts have not changed -- if anything, the bursting of the technology bubble and the Enron fiasco have made them more skeptical -- many people are wondering why Branson is coming back to the market.

  Given the opacity of his companies' finances, the rush to sell shares to the public has revived rumors of a cash crisis that last appeared when he sold 49 percent of Virgin Atlantic Airways, his single biggest moneymaker, to Singapore Airlines in 1999 for ?600 million (US$875.5 million at current exchange rates).

  Branson is again dismissing speculation about his solvency, saying he is courting the stock market only to allow his loyal partners, many of whom are venture capitalists, to cash out of their investments. Since 1999, he has raised ?1.3 billion by selling stakes in companies, including Virgin Atlantic, Virgin Blue, Virgin Radio, Virgin Cinema and Virgin Active, a chain of health clubs.

  He bristles at the suggestion that he is in financial trouble and boasts that he has never closed a Virgin company. He also dismisses skeptics who entertain such ideas, particularly financial journalists, as cynics "who are only going to become famous if they can predict the downfall of people."

  Outwardly, Branson, 51, still appears the carefree tycoon, an image that he has carefully cultivated by flying in hot air balloons and dressing in drag to promote his businesses.

  Worth an estimated ?1 billion, according to a list of wealthy Britons from The Sunday Times of London, Branson has certainly embraced the trappings of a tycoon. He owns an Oxfordshire home that sits on a 450-acre estate, complete with its own cricket field and Indonesian teahouse. He also owns a town house in London and Necker, a resort in the British Virgin Islands.

  But a growing number of critics contend that Branson's charm and knack for publicity shelter a financial house of cards. Branson and his deputies, these people say, routinely make aggressive projections that are rarely achieved, creating the impression that his companies are performing better than they are.

  Stagnant sales

  For example, Will Whitehorn, a Virgin director, recently predicted that the Virgin companies would collectively record a 60 percent jump in sales, to US$8.3 billion, by the end of 2003.

  But for the last four years, sales have been virtually stagnant. He also forecast that losses, which have totaled US$413 million the last two years, would turn to profits of US$290 million this year and US$580 million next year.

  Some analysts said they were skeptical that Virgin would meet those targets, given the company's flat sales, the current sluggish economy and the problems confronting the airline industry and the British rail system, areas in which Virgin has large operations.

  "Unless they are planning a really big push into a new market sector, it's hard to see where the extra revenue will come from," said Rita Clifton, the chief executive of Interbrand, a global brand consultant.

  Branson takes pride in not having his businesses go out of business. But some analysts wonder whether never acknowledging defeat makes good business sense. "A more astute businessman would be closing down businesses that are clearly not working and redirecting assets to the ones that are," said Alan Brew, a principal at Addison Branding and Communications in New York.

  Branson's supporters say such criticism is unfair.

  "The vast majority of new businesses fail spectacularly," said Ken Berry, the former head of the EMI Group's recorded music business, who first met Branson in 1973, soon after the start of Virgin Music. "Just about everything Richard does gets on the radar screen."

  Some people who have worked with Branson said they were concerned that he relied too heavily on gimmicks as a cure-all for important business problems.

  Flawed business sense

  "Richard believes everything can be done through publicity, which isn't the case," said Chris Moss, who spent eight years as marketing director of Virgin Atlantic and is now a marketing consultant.

  For instance, fresh from his days as a music maverick, Branson initially branded Virgin Atlantic the rock 'n' roll airline.

  Moss, who eventually convinced Branson that the airline needed to change its advertising, said: "People want to know that the business-class seats have more room than any other airline, not that Virgin Atlantic is groovy. It took us years to recover from that rock 'n' roll image."

  Likewise, the marketing strategy for Virgin Cola in the US made an initial impact when Branson drove a tank through Manhattan. But the company lacked a long-term plan to erode the market shares of rivals, said Jim Smith, chairman of Ground Zero, a San Francisco advertising agency that worked on the rollout.

  "He tried to do it on the back of his own winsome charm," Smith said, "and he fell flat on his face."

  Branson, who is dyslexic, says he is not one for poring over pages of spreadsheets and plotting strategy based on estimates of market share.

  "In the end," he said, "it is your own gut and your own experience of running businesses."

  Stock market investors, though, are likely to require more than a sixth sense before taking another chance on Virgin.
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