Sunday, May 06, 2007

Qantas fiasco deepens

The on-again, off-again $11 billion bid for Qantas is in limbo. The time deadline for 50% acceptances for the offer had expired Friday but a late acceptance, after the deadline, took the tally to 50.06%. If the next stage of the takeover is allowed to proceed we will have developed a whole new meaning to the term bid ‘deadline’.

The word around town is that, of the $5-45 offer, about $4-00 will be transferred back to the private equity acquirer Airline Partners Australia (APA) over the next couple of years. This will transfer most of the debt APA has incurred in acquirinng Qantas back onto a now highly-geared Qantas. This will leave an equity share in Qantas valued at about $1-50 but giving control over a giant highly-geared airline that will pay almost no tax.

I hope the takeover bid fails but, irrespective of what happen, CEO Geoff Dixon is a failed executive who should be given his marching orders. Board Chairman Margaret Jackson should also disappear. Given the huge salaries this pair has gained it would be unreasonable to see their management failures rewarded further. If APA gains control they should also appreciate the ineptitude of the pair that have done so much to drive the case supporting this buyout.

Qantas will be left as a debt-ridden shell with a chance of earning a huge speculative profit for its private equity purchasers not because of any special knowledge they bring, but because Qantas will avoid paying much tax. And Geoff Dixon sees this arrangement as an efficiency-based, debt-driven way of driving through the reforms in Qantas that he wanted to introduce but could not. Why couldn't he? Why the need to sell out the interests of current shareholders to APA so it can make the structural changes to Qantas that have long been needed?

It is a consequence of the equity premium puzzle that pure buyouts of equity by debt of this type can work. And shareholders will only fall for this pathetic line if they sell out for a short-term gain leaving the chance of a really big gain – on the basis of inexpensive amounts staked – to the big end of town to groups such as Macquarie Bank.

One possibility if APA does gain control is to totally deregulate the Australian domestic and international airline markets. While restrictive Air Service Agreements made dubious sense in terms of providing shareholder value, they make zero sense if the stakeholder is a private equity speculator seeking a quick buck on the basis of poorly-advised current shareholders..

In my view deregulation is essential. No mercy! Let whoever runs Qantas face genuine competition and let Aussie customers and tourism suppliers everywhere reap the gains.

Update: The deal seems to have fallen through - the Takeover Panel rejected requests for a deadline extension - though their remains talk of a further bid. The AFR (today, subscription required) guess that the deal collapse was initiated by one ofv the arbitrageurs (Samuel Heyman) holding out in the hope of a sweeter price at the next stage of the bid approval process. SH's hope was to get a premium as the 'holdout' guy. Qantas shares were suspended from trading this morning so we don't know the losses.


Edward said...


Reading about this, and the lack of good faith and trust shown by the various parties (SH and the two other large hedge funds and MacBank) is quite extraordinary. Did this bid really fail because SH thought MacBank were bluffing? Did SH really think he could screw his fellow hedge fund colleagues?

hc said...

There was either a game of bluffing going on or a cockup of monumental proportions.

The desparate huffing and puffing going on at present by APA suggests someone haqs lost a lot of money on this one.