Private equity bid for Qantas is too low

As Allco Finance Group reveals its involvement in the takeover talks, analysts warn that the mooted price of A$5.20 per share for the national carrier wonÆt fly.
Analysts following the rumour that AustraliaÆs national carrier Qantas is about to be bought by a private equity consortium say the mooted price of A$5.20 a share is too low and that the deal will fail unless the bidders increase their offer to around A$5.50 a share, valuing the company at just over A$11 billion ($8.3 billion).

Talk about the sweet spot for the daring takeover bid came as Allco Finance Group emerged as another potential partner in the consortium led by Macquarie Bank and buy-out firm Texas Pacific Group (TPG). Qantas confirmed on Wednesday that it had received an unsolicited approach from Macquarie and TPG, but that the proposal was ôconfidential and incompleteö. The airline is being advised in its defence by UBS and Carnegie, Wylie & Co.

Allco notified Australian shareholders on Thursday that it was considering a role in the consortium and that Qantas remains a ôlong-standing major and valued clientö of its aircraft leasing business. Allco, an Australian investment house that was the first to launch a pan-Asian Reit in March this year and more recently hired former Swire chairman David Turnbull to pilot its Asian expansion, currently leases 22 aircraft to Qantas

ôThese leases are term leases for periods of eight to 12 years,ö the company said in its statement. ôWhile Qantas is a long-standing client, our aircraft leasing portfolio is broadly diversified across a range of lessees.ö The company also said it planned to continue building its aircraft leasing business, ôwith Asian markets being a significant focusö.

Most analysts were unmoved by the news that Allco might take part in the bid. ôI donÆt see the significance in the Allco announcement,ö says one. ôThe real issue is the rumoured price of A$5.20 per share. The Qantas board and shareholders arenÆt likely to accept an offer at this level. It probably needs to be closer to A$5.50 before the bid will get taken seriously,ö says the analyst, though he admits that this puts a high valuation on the business. ôAt these levels Qantas isnÆt trading on fundamentals but Macquarie Bank operates using its own calculators and financial models. Macquarie obviously thinks it can make a profit by privatising [the company] or it wouldnÆt be pursuing it.ö

The analyst says there are several elements to Qantas that would attract a buyer like the Macquarie/TPG consortium. ôThe company has stable cash flows, it has a low gearing level of 39% and it operates in a comfortable duopoly in its home market,ö he says. It has also been the only international airline to report steady profits since the September 11 terrorist attacks.

Commentators are wondering whether the consortium might find some upside by selling off certain non-core assets. ôThe buyers could streamline the business by selling assets like its airport terminals, its Qantas Holidays division or its inflight catering business. These assets could net between A$2 billion and A$3 billion.ö

One thing the financial sponsors will have difficulty doing is implementing better corporate finance practices at the company. One of the reasons Qantas has avoided a drop in profits in the current competitive aviation market is due to its financial savvy. ôThe company has a significant hedging programme in place which has helped to iron out fluctuations in the oil price,ö says the analyst. ôI canÆt see how another party could improve on this structure.ö

While the market waits for firmer details of the bid, commentators are making a long list of the hurdles the consortium will face including: competition restrictions (Macquarie already owns and manages Sydney Airport); protests from workersÆ unions worried about potential layoffs; special legislation that requires the carrier to remain in Australian hands; a ban on any one entity owning more than 25% of the companyÆs shares; and, dare they say it, jingoistic national defiance from retail shareholders.

Late Wednesday Macquarie responded to concerns about foreign ownership by saying any bid would adhere to existing rules governing Qantas. It also said the discussions were preliminary and that any proposal would need the approval of the board. This suggests the takeover process will remain friendly.

Macquarie Bank isnÆt shy of controversial bids. In December last year it made a failed attempt to buy the London Stock Exchange for ú1.5 billion. More recently it was part of a consortium that bought Thames Water in the UK for an enterprise value of ú8 billion.

Its latest deal in the UK was revealed as recently as yesterday with an announcement that it plans to buy British gaming machine operator Talarius in a joint takeover with Tattersall's, valuing Talarius at A$338 million. The directors of Talarius have unanimously recommended the ú2.70 in cash per share bid.

Qantas shares traded up 1.5% to A$5.00 on Wednesday (November 22) when the proposal was announced. But by the end of trading on Thursday they had dropped back to A$4.93.
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