Qantas Fire-Sale Discount Seen Inviting LBO After Plummet

Qantas Airways Ltd. is so beaten down that acquirers can buy Australia’s biggest carrier for less than its value in a fire sale.

Qantas, which fell to an all-time low this month after forecasting its first annual loss in at least 17 years, traded at a record 61 percent discount to its $5.6 billion in so-called net tangible assets, according to data compiled by Bloomberg. By that measure, Qantas is undervalued by as much as $3 billion.

While fuel costs and intensifying competition doubled losses on overseas routes and a law limits foreign ownership in the carrier, Qantas is now cheap enough to lure bidders, said BT Investment Management Ltd. Qantas, which hired Macquarie Group Ltd. to fend off unwanted private-equity bids, has 65 percent of the Australian market, where the Sydney-to-Melbourne route is busier than any in North America or Europe. The domestic unit, projecting a near-record operating profit, alone could have a higher value than Qantas commands, Deutsche Bank AG said.

“Qantas has a lot to offer, in particular the strength of the corporate domestic market,” Cameron McDonald, a Melbourne-based analyst at Deutsche Bank, said in a telephone interview. “There is appeal at these levels. They’ve got a range of things that are world class.”

The airline won’t comment on speculation and hasn’t had a “formal” approach from private-equity groups, Alan Joyce, Qantas’s chief executive officer, said in an e-mail.

“Fair value for Qantas shares is a lot higher than it is today,” the 45-year-old CEO wrote. “Our shareholders know we are on the right path.”

Outback Mail

Qantas, which rose as much as 4.8 percent today, ended 2.2 percent higher at A$1.18 a share in Sydney, its highest since before the June 5 profit forecast.

Qantas has flown scheduled flights since 1922, when a biplane began delivering mail between Cloncurry and Charleville, outback towns in the state of Queensland that had a combined population at the time of about 3,600.

The carrier, which has never suffered a fatal crash since it began flying jet-powered aircraft in the early 1950s, was controlled by Australia’s government from 1947 until its initial public offering in 1995.

Qantas has tumbled 36 percent in the past year as fuel costs rose and airlines from the Middle East attracted more customers on routes between Asia and Europe.

Exacerbated by Europe’s economic crisis, Qantas International will probably have an operating loss of A$450 million ($450 million) in the year ending this month, the airline said June 5, more than double the unit’s deficit last year. The group also expects a full-year net loss, the first since its IPO, after as much as A$574 million in one-time costs.

Lowest Valuation

While Qantas said its domestic operating profit will rise to A$600 million this year and its international business will return to profitability by 2014, the stock still plunged 32 percent in four days after the announcement, wiping off A$1 billion of market value as it fell below A$1.

Worth almost A$12 billion in 2007, Qantas ended at A$1.155 a share last week, leaving it valued at A$2.6 billion.

Qantas traded at a low of 0.39 times tangible book value on June 8. The shares have risen 21 percent since then as takeover speculation intensified. The measure of shareholder equity excludes assets that can’t easily be sold in liquidation and includes cash, planes and parts, hangars and investments in other companies.

The company, which said last week that it had hired Sydney-based Macquarie to ward off potential bids by buyout firms, is now valued at 0.47 times its net tangible assets.

Frequent Fliers

That’s still lower than any airline in the industrialized world with more than $1 billion in market capitalization, apart from Air France-KLM, data compiled by Bloomberg show.

“The overwhelming appeal is its discount” to net assets, Simon Fitzgerald, an analyst at Moelis & Co. in Sydney, said in a telephone interview. “Compared to its peers it’s cheaper, compared to the market it’s cheaper, and compared to its history, it’s far cheaper.”

Qantas could be a lucrative investment for potential buyers able to turn around its international business because of the airline’s dominance in Australia, according to Jason Teh, who helps manage A$2.3 billion at Investors Mutual Ltd. in Sydney.

Australians flew 2.3 domestic flights per person in 2010, the highest rate among any of the world’s 10 biggest domestic travel markets, according to data from the International Air Transport Association and national census bureaus.

Domestic flights in the U.S., the world’s largest market by passenger numbers, came to 1.9 per person. Canadians flew 1.2 flights per person and all other nations were less than one.

Busiest Routes

Qantas says its namesake carrier and low-cost unit Jetstar account for two-thirds of flights within Australia, benefiting from demand for flights between Sydney and Melbourne.

The route is the world’s fifth-most active and busier than any in Europe or North America, according to Amadeus IT Holding SA, the world’s largest processor of travel reservations.

In the U.S., no single carrier had more than a 17 percent share, according to 2010 data from IATA and the U.S. Department of Transportation.

With Singapore jet fuel prices falling by the most since the financial crisis in the past three months, the company’s fuel bill also may decrease in 2013 for the first time in three years, according to Moelis’s Fitzgerald.

“The domestic business generates good profits,” Teh said by phone. “Whoever can resolve the international business is going to make lots of money, whether it’s the current management or new owners.”

Relative Value

Qantas Domestic by itself is worth about A$6.5 billion excluding its share of corporate costs, according to a report by Deutsche Bank’s McDonald dated May 24. He based the valuation on his estimate for Qantas’s earnings next year.

That’s more than the entire company’s so-called enterprise value, or the sum of its stock and net debt, of A$6 billion, according to data compiled by Bloomberg.

Combined with its other units, Deutsche Bank’s estimate for Qantas would then reach A$8.4 billion based on McDonald’s sum-of-the-parts analysis, 40 percent above its current level.

While the estimate was published before Qantas’s full-year loss forecast and McDonald said a revised valuation would be lower, he added the stability of the domestic business would mitigate some of the weakness internationally. McDonald last week declined to offer an updated valuation analysis.

Qantas also owns stakes in freight, catering, and travel agency companies, as well as a terminal at Sydney airport, which together are worth about A$1 billion, according to Sondal Bensan, an analyst at BT Investment.

Qantas Law

The fund manager is owned by Westpac Banking Corp., Qantas’s seventh-biggest shareholder with a 5.1 percent stake, data compiled by Bloomberg show.

Any buyer will have to comply with the Qantas Sale Act, which requires that the airline remain majority-owned by Australians. Individual overseas companies aren’t allowed to hold more than 25 percent, while the total owned by all foreign carriers can’t exceed 35 percent.

The company’s unions may also resist cuts to salaries or benefits that would be needed to help turn around the airline, according to Matt Crowe, a Sydney-based analyst at Commonwealth Bank of Australia. Last year, Qantas spent a greater share of its sales on salaries and benefits than any other airline worth more than $1 billion, data compiled by Bloomberg show.

“The groups involved -- the pilots union and engineers -- they’re pretty powerful and it’s a company with a culture of union activity,” Crowe said in a telephone interview.

Deal Structure

Those hurdles still haven’t prevented private-equity firms from working together to try and acquire the carrier. In 2006, a buyout group that included Fort Worth, Texas-based TPG Capital, Toronto-based Onex Corp. and Macquarie, Australia’s biggest investment bank, agreed to buy Qantas for about A$11 billion.

The transaction was structured so the largest stake in the group, called Airline Partners Australia Ltd., would be held by Australia’s Allco Finance Group Ltd., which filed for bankruptcy in November 2008.

The deal, rejected by Qantas shareholders, put Qantas’s enterprise value at 5.72 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. Qantas is now worth 3.77 times the average of analysts’ Ebitda estimates for the year ending this month.

Qantas also held merger talks with British Airways Plc in 2008, while the Australian newspaper said in November that former Qantas CEO Geoff Dixon and a group of investors considered buying a stake last year.

“There have to be people looking at a takeover,” BT Investment’s Bensan said in a telephone interview. “There’s no doubt there’s value in it.”