July 11, 2019 / 2:28 AM / 5 days ago

UPDATE 3-Virgin Australia's frequent-flyer partner seeks to exit stake

* Affinity bought 35% stake for $233 mln in 2014

* No time frame or terms set for exit

* Float or trade sale are options (Adds investor comments, background)

By Jamie Freed and Tom Westbrook

SINGAPORE/SYDNEY, July 11 (Reuters) - Virgin Australia Holdings Ltd said on Thursday that Affinity Equity Partners is seeking to exit its 35% minority stake in the carrier's Velocity frequent flyer programme, five years after its A$335 million ($233 million) purchase.

Australia's second-largest airline said that it intended to stay a majority investor in Velocity, which competes with the larger Qantas Airways Ltd frequent flyer programme for Australian customers.

The potential Affinity exit is a fresh test of investor demand for loyalty programmes after airlines Air Canada and Brazil's Gol Linhas Aéreas Inteligentes SA, which had spun off their frequent flyer programmes, last year bought out minority shareholders to regain full control.

It also comes as Virgin is re-examining its broader strategy under the leadership of new CEO Paul Scurrah, who took over from CEO John Borghetti in March.

Virgin said Affinity, a private equity firm, had requested it explore various options for the stake sale. No time-frame or terms have been set, Virgin added in a statement to the stock exchange.

In a bond prospectus issued in 2014, Virgin said there was a potential for Affinity to exit via a float or trade sale within three years of the purchase date.

Virgin has a first right of offer in relation to Affinity's stake in certain circumstances and has the right to participate in other exit mechanisms available to Affinity, according to the prospectus.

By the first half of the 2019 financial year, Velocity had 9.5 million members and was on track for annual EBIT of around A$120 million.

Based on its earnings, Velocity could be valued at around A$2 billion, The Australian Financial Review reported on Wednesday, citing analysts. A source familiar with the matter told Reuters that estimate was too high but declined to provide a figure.

Akshay Chopra, a portfolio manager at Melbourne's Karara Capital said Virgin would probably seek to buy the Affinity stake or bring in another partner rather than lowering its stake.

"As long as you can expand the membership base...then it's an attractive business," he said, citing the relative stability of the earnings relative to the more volatile airline business.

The value of loyalty schemes lies in the steady income from banks, retailers and other partners who pay up front for points and then pass them on to customers who typically do not redeem them with airlines for many months.

"It's a tremendous money spinner," said Steve Worthington, a marketing professor at Swinburne University of Technology in Melbourne, though he noted Virgin's was a more modest scheme than one run by rival Qantas.

Qantas had previously considered a float of its loyalty business, which has nearly 13 million members, but decided to retain 100% because it is a reliable source of cashflow.

Affinity's decision comes as Virgin expects to post a loss this year.

Virgin in April said it would delay taking the first deliveries of Boeing Co 737 MAX jets for nearly two years to reduce capital spending. ($1 = 1.4355 Australian dollars) (Reporting by Jamie Freed in Singapore and Tom Westbrook in Sydney; additional reporting by Nikhil Kurian Nainan in Bengaluru; Editing by Stephen Coates, Richard Pullin & Uttaresh.V)

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