Qantas Bid Hits an Air Pocket

A key Australian shareholder rejected the Macquarie Bank-led, $8.6 billion takeover offer for the iconic national carrier

Ordinary Australians have generally railed against the controversial sale of Qantas Airways (QUBSY), a venerable and profitable airliner with a 65% domestic market share, to a group of international investors led by Sydney-based Macquarie Bank (MQBKF), according to local opinion polls. The opinions that really count, however, are among the airliner's major shareholders—and on Mar. 23 a crucial one rejected the offer.

Balanced Equity Management, a Sydney fund and 4% owner of Qantas, formally rejected the A$5.45 ($4.39)-per-share, or $8.6 billion, deal in a letter to the airliner, suggesting it would take a richer price to get its approval.

Huge Buyout

"Since the announcement of the bid in December, 2006, equity markets have appreciated," wrote Andrew Sisson, director of Brand Equity. "Given the current level of the share market, in the absence of an adverse development in relation to Qantas, or a fall in the equity markets, we do not intend to accept the bid."

Qantas accepted the Macquarie group bid on Nov. 22 last year. In response, the buyout group today extended its bid from early next month to Apr. 20.

This could be a deal-buster for Airline Partners Australia, which is trying to engineer the biggest airline takeover ever. Airline Partners is the name of the buyout group led by acquisitive Macquarie Bank and includes private equity giant Texas Pacific Group, Canada's Onex (ONEXF), and Allco Finance Group.

Different Expectations

The Australian government, assured that Qantas will stay majority owned by Australian interests, has signed off on the deal. However, the group needs 90% of Qantas shares to compulsorily buy the rest, under Australian takeover rules. That threshold is also critical to getting together the debt package that would finance the lion's share of the deal.

UBS Global Asset Management, owner of roughly 6% of Qantas shares, may also be leaning against approving the bid at the current price, according to a recent report in the Australian Financial Review. Qantas shares closed down 1% in trading today at the Australian Stock Exchange.

One reason for the reluctance by Balanced Equity is the roughly 11% runup in the S&P/ASX 200 Index since the takeover drama started up back in late-November.

Meanwhile, credit agencies have cast a wary eye at the amount of debt behind the deal.

Standard & Poor's on Nov. 22 placed Qantas on its credit watch list "with negative implications." The move "reflects the potential significant weakening in credit quality that could accompany a successful leveraged buyout of Qantas, given the expectation that any buyout would be substantially debt financed," the credit agency said in a statement. S&P, like BusinessWeek, is a unit of the McGraw Hill Companies (MHP).

Still Profitable

Nobody argues that Qantas isn't one of the best-run airlines in the business. Qantas CEO Geoff Dixon has been widely lauded for a focused, five-year, cost-cutting program dubbed "Sustainable Futures" that is on track to generate savings of $2.3 billion by 2008.

The airline also wins kudos for having hedged 100% of its fuel needs before prices spiked last summer. That has allowed it to stay profitable (a rarity in global aviation) and maintain an aggressive fleet expansion program.

Dixon has committed to buy 20 Airbus A380s, despite well-publicized production delays in the next-generation carrier, in order to deploy them on long haul routes from Australia to the U.S. and Europe. The carrier is also in the process of acquiring 45 Boeing 787s. On top of that, Qantas has just expanded its low-cost Jetstar airline brand for medium- and long-haul international routes.

Qantas is one of Australia's most fabled business brands and was founded back in 1920 as the Queensland & Northern Territorial Aerial Service. (Hence the modern name, Qantas.)

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