And investors are not happy about it.
With stock markets slumping in Wednesday trading, we just learned the reason behind one of this week's weaker performers -- discount airline Virgin America, whose shares are down 6.8% since the week began, and were down 5.8% on Wednesday alone. The reason, it seems, appeared in an S-1 filing with the SEC Monday, describing how inside shareholders of the low-fare carrier plan to unload nearly 5.6 million shares on the market.
Cue the gory details
Here's how the selling will go down:
Virgin's largest stockholder, hedge fund Cyrus Aviation Holdings, LLC, currently holds 10.5 million shares of Virgin stock -- 29% of the total. Assuming a full exercise by the secondary offerings underwriters of their right to buy additional shares, Cyrus' interest in Virgin will decline to 20.5% after the offering concludes.
Separately, we will see VX Holdings, L.P.'s (this is Sir Richard Branson's company) beneficial ownership decline from 24.9% (9.7 million shares) to 24%, while PAR Investment Partners, L.P.'s (another hedge fund) interest falls from 6.2% to 5.6%.
Aside from Stephen C. Freidheim, who S&P Capital IQ indicates is the company's Non-Employee Director and Chairman of Audit Committee, and who the S-1 clarifies controls "sole voting and dispositive power" for Cyrus' shares, no individual executive officers or directors are selling their stock.
The upshot of all this selling, as Virgin explains in a press release, is that Cyrus and the Virgin Group, which, prior to the sale, held 48% of Virgin's voting common stock and 56.2% of its total outstanding equity interests, will own 40.5% of the votes, and 45% of the equity, post-secondary offering, "assuming no exercise of the option to purchase additional shares." (Assuming the overallotment does get exercised in full, these three insiders would still own 50.1% "beneficial ownership," according to the S-1).
What it means to investors
From at least one perspective, maybe that's not such a bad thing. While investors certainly seem spooked by the sale, they've already been richly rewarded for their early interest in Virgin America. After all, the airline priced at $23 in last November's IPO, opened at $27, and has since soared to north of $32 a share -- even after this week's sell-off. That's a 40% profit -- not bad for four months' "work."
And while the insiders are certainly selling a large chunk of their holdings, they're a long way from abandoning the company entirely. Post-offering, Branson's company, and his hedge fund partners, will still own about half of the company's equity, but fewer than half the votes, meaning they will no longer have full control over Virgin.
The bigger risk for investors in Virgin America is the stock's valuation. At the current market capitalization of $1.4 billion, Virgin Stock costs about 17.5 times last year's free cash flow of $80 million, and 23.5 times trailing earnings of $60 million. Virgin pays no dividend, and Capital IQ estimates that profits will grow at about 10% annually over the next five years. To me, that seems like a lot to pay for no dividend and not much growth.
Or put another way: Yes, Virgin's insiders are selling a lot of stock this week. But the real surprise is that they're not selling even more.