Souter gains a place at Virgin table

Outlook

IT IS hard to imagine a more striking contrast than Brian Souter and Richard Branson, the latter tanned, smooth and perfectly groomed, the other looking for all the world like someone who has just crawled out from beneath a bush, with his Glaswegian pallor, stained red jacket and scuffed-up shoes.

But plainly there's more in common here than meets the eye. They're both fabulously wealthy, though by very different routes; they're both mavericks; they both have a poor, though possibly unjustified reputation for quality of service as train operators; and when it comes to business, they are both as sharp as razors.

So the question is, just who is screwing who in the rabbit-out-of-a-hat deal announced by Virgin Rail yesterday on the eve of its planned stock market flotation? The City took one look at the deal and made up its mind that it must be Mr Branson, marking Stagecoach shares down 4 per cent.

Mr Branson's stake in the enterprise rises from 41 per cent to 51 per cent at no extra cost to himself. The venture capitalists who have supported the train company thus far make a clean exit at an apparent premium to what the company could have been floated for. Sleeping financial stakeholders are replaced with a strategic partner that can bring real value to the party. And last but not least, Mr Branson is saved from the hassle and public scrutiny of a shares float.

In return for his pounds 138m, Mr Souter gets - well, just 49 per cent of Virgin Trains, which is still a quite high-risk venture. Though it seems to be making good profits now, it will be in deep trouble when its public subsidy declines soon after the turn of the century if it fails in the meantime to meet some heroic assumptions on growth in passenger traffic.

Still, Mr Souter presumably knows what he is doing. Stagecoach unsuccessfully bid for both the Virgin franchises when they were up for sale, and according to Mr Souter, his own traffic growth assumptions weren't so very different from Mr Branson's. Since then prospects have improved, both because passenger numbers are higher than expected and because Virgin has been clever at transferring the risk of new investment to Railtrack and manufacturers. Mr Souter believes the real value of the franchises is substantially higher than the flotation price.

So this may be one of those rare instances where both sides gain from the deal. Certainly it's not all Mr Branson's way. Belligerent and nosy though stock-market investors can be, they could have something to commend them over Mr Souter, a competitor, sitting there like a cuckoo in the nest.