Changes to the A$11.1 billion private equity bid for Qantas set new international fi nancing benchmarks for all private equity transactions, accordingto market observers.
To overcome resistance from key fund managers, the international Airline Partners Australia consortium bidding for Qantas has cut shareholder acceptance conditions from 90 to 70 percent and extended the acceptance deadline until May 4. Qantas shares rose 8c to $5.39 as confi dence grew that the stalled $5.45-a-share bid could now succeed. APA said it has acceptances from more than 30 percent of Qantas’140,000 shareholders.
It said it proposed to make a “capital management review” of the airline to pay $1.5 billion of Qantas’ retained earnings as dividends and make a $2.5 billion capital return within 12 monthsof taking control.
It said management policy may involve capital reductions of up to about $4.5 billion in aggregate and payment of dividends of up to 100 percent of Qantas’ retainedearnings.
Some of the dividends and payouts will be funnelled directly from an extra US$1.7 billion (A$2.1 billion) loan provided by APA’s lendersto Qantas.
“Airline Partners Australia’s proposal is that the increase in Qantas’debt be used to fund these distributions,” it said in a statement to the stock exchange.
Based on Qantas’ $5.45 share price, the dividend and capital return would work out at $2.23 a share, or 36 percentof the offer price.
Financial analysts are calling this the world’s biggest margin loan and say it sets a new dimension for private equity takeovers. Some said that because the private equity consortium had raised only $3.5 billion of their own money and $7.6 billion of debt to fund the $11.1 billion takeover, they could effectively get all their money back within the fi rst 12 months while debt raised to fund the deal would ultimately have to be paid off by Qantas, not the consortiummembers.
They said that despite the fact that up to 30 percent of other shareholders may be along for the ride, the APA bid follows a typical private equity tactic of getting control of a company that makes a lot of cash but has not got too much debt, gearing up the company to repay their initial investment while selling some non-core assets then selling the business back into themarket in fi veyears for a handsome capital gain.
Under normal private equity deals the banks that lend the money to do all this have security over the assets of the company, which are suffi ciently valuable to give the lenders enough comfort that if anything goes wrong inthe plan the fi nanciers won’t lose.
But cutting acceptance to 70 percent and keeping the company public means banks lending to the consortium will not have full security over Qantas assetsand could lose if its shares are hit.
To cover this banks have reportedly increased their rates – but apparently there is enough money available and enough confi dence in Qantas’ futureto make the risk attractive.
APA spokesman Bob Mansfield warned shareholders that Qantas faced increasing competition from Middle Eastern airlines and the pending entry of the Singapore Airlines- backed Tiger Airways into the domestic market. He did not mention that Qantas has had three profi t upgrades since speculation of the bid fi rst surfaced, and that Qantas aircraft are the fullest they have been since the airline was sold by the Keating government in the mid-1990s. Qantas said it was on course to post a record full-year profi t, despite the recent rise in oil prices, thanks to record passengerdemand and cost cuts.
Mansfield said no firm arrangements had been discussed with Qantas executives who would have collectively stood to benefi t from the company’sprivatisation.
As part of the original APA offer, senior Qantas executives were being invited to roll shares accumulated during 10 years since the airline was privatised into a share in APA at the fully paid-up value. Beyond that, they could access shares in a share bonus scheme. Executives were to be provided with interest-free purchase loans by APA. Under the original offer they also stood to receive increases in their annual salaries as well as bonuses of up to 200 percent of the cash component of their base salary fromnext year.
APA said it would replace existing external directors with its own nominees and might seek payment for consulting services toQantas.
Despite two of APA’s largest shareholders being aircraft leasing companies– Allco Financeand MacquarieBank – Mansfi eldsaid there hadbeen “no discussion”to sell therights Qantas hasto purchase anextra 70 Boeing787s on top of itsexisting 45 787order.
Given the lack of available aircraft worldwide, it is believed APA could make a huge profi t selling these rights to airlines desperate to get their handson new aircraft.
Unions were alarmed at news of the planned payouts. Australian Council of Trade Unions senior industrial offi cer Richard Watts said Qantas managers had previously asked staff to take pay cuts to keep down theairline’s debt.
“With high debt levels, they’ve said that Qantas would not be in a position to expand, not in a position to protect existing jobs,” he said. “Now we’re told exactly the opposite by managers who stand to personally gain by the arrangements with the private equity bidders.
“We are investigating the industrial and legal options open to employees to protect themselves and the Australian fl ying public from these blatant asset strippers. “This is an action Gordon Gekko would have been proud of.”