QANTAS being taken over by Macquarie Bank..

[QF WP]

It had been questioned repeatedly since the offer was announced last week that APA has gone to great lengths to avoid scrutiny from ACCC, FIRB and Federal Government. You do not do this if your intentions are above board.

JohnK :?:, I'd read the following quote from serfty (he beat me to posting it), which as it's from Terry McCann, a respected business journalist, I'd respect his research and comments...

I cannot see how private equity will make money out of QF without job cuts (which will lead to reduction in levels of service, less FA's per flight etc), shifting maintenance overseas, devalue and/or sell the FF program, sell the catering business, AEP to buy all aircraft that QF/JQ owns and lease back to QF/JQ at greater cost. A private equity firms sole intention is to make money. They are in the business of developing their own company not the companies that they takeover.

Any sensible shareholders in a business will have an entry (as well as an exit) strategy. Their entry strategy is to allow access to significant capital raising opportunities for the revitalisation of particularly the QF fleet, whilst leaving the management to develop the Qantas business (by whatever plans the management see that will increase the value of the business). Then the owners have an exit strategy that in the next 8 to 10 years, where they will sell it back to the market at a profit. They may marginalise some people, but they aren't in the business to worry about that - profit is the name of the game.

 

[serfty]

Interesting Article in Today's Herald Sun

From Qantas fears soar too high | Herald Sun ...

Qantas fears soar too high

Terry McCrann

December 19, 2006 12:00am
Article from: Herald-Sun

MUCH of the hostile reaction to the proposed Qantas takeover is misguided and verging on the hysterical. ...

... The only 'problem', is that the bid has to 'pass muster' on two quite separate bits of foreign investment rules. The specific Qantas Sale Act and FATA, the long-standing Foreign Takeovers Act that applies generally.

What's crucially important here, is that while approval under FATA is at the Treasurer's discretion, the Sale Act is absolute. If you can't pass it, you can't make the takeover.

The crucial rule in this regard is that no one shareholder can have more than 25 per cent. And you can't get around it, by splitting a bigger holding into bits - all 'associates' are grouped together.

The critical question is whether the foreign investors are associates. There are essentially three, Texas Pacific, the Canadian company Onex and 'other' - understood to cover a small group of big investors.

Now the bidders have done a number of very interesting things. Texas Pacific will have a 25 per cent stake in the takeover but a 'voting interest' of only 15 per cent. And Onex a stake of 12.5 per cent but a voting interest of only 9 per cent. The 'other foreign' will have an 11.5 per cent economic interest but actually a higher voting interest of 15 per cent.

These percentages are very interesting. Texas Pacific and Onex combined have a 37.5 per cent real interest in the bid, but only a 24 per cent voting interest.

That seems to be conceding that they are associates, and so they are in effect 'one shareholder'. But if so, that would put them above the 15 per cent single shareholder trigger of FATA.

Yet the total foreign voting interest is being kept below 40 per cent, seemingly to avoid triggering the combined foreign FATA trigger.

So is an application for approval to Costello required? For what other logic is there in reducing the foreign voting interest?

If you have to apply for FATA approval anyway - because of the Texas Pacific-Onex association - why bother about the 40 per cent trigger?

All this seems to be about carefully 'meeting' both sets of rules.

1. Keeping the total foreign real interest at 49 per cent, and so within the Sale Act.

2. Keeping the total foreign voting interest below 40 per cent and so arguably not triggering the 40 per cent mark under FATA.

3. Keeping the Texas Pacific-Onex voting interest under 25 per cent. So that if they are considered associated, they would not breach the Sale Act.

But if Texas Pacific and Onex are associated, why not the 'other foreign'? Because if they are, the 'one' foreigner has 39 per cent, even of the reduced voting interest, and that would breach the Sale Act.

If so the takeover would be illegal and could not take place because it could not be 'approved'.
[edit: My Bolding & Underlining]

 

[Kiwi Flyer]

I cannot see how private equity will make money out of QF without job cuts (which will lead to reduction in levels of service, less FA's per flight etc), shifting maintenance overseas, devalue and/or sell the FF program, sell the catering business, AEP to buy all aircraft that QF/JQ owns and lease back to QF/JQ at greater cost.

Like any owner they are looking to make a decent return on equity. Since the return they are looking for is higher than the cost of borrowing (for them), and since QF doesn't have excessive borrowings currently, they can increase borrowings to reduce their equity and improve the return on equity even before any cost cutting. (Same principle applies to mortgages on rental properties as long as yield is positive you can get a higher return on capital from having a mortgage than if you had no mortgage - ignoring any complicating factors like tax.)

This is one way how private equity works. They can borrow more against the balance sheet than a listed company (since less concerned about the increased volatility this brings) and possibly borrow funds at a cheaper rate. Net results is their return on equity is higher than the return on equity provided on the sharemarket, even before any cost cutting.

 

[simongr]

I think it breaks down like this:

If your equity at the moment is 1000 with profit of 120 your return is 12%

If you then take on debt instead of equity and borrow at say 8% your return on your investment (in this case 250 rather 1000) leaps up to 24% - without any change in operating profit

Equity	Debt	Profit	ROE	Interest rate
1000	0	120	12%	
250	750	60	24%	8%

Profit has reduced by the value of interest you are now paying - but you dont care as you now only have 250 invested. If you bought four companies like this not only is your risk diversified (as long as they are not all airlines ) your actual profit is now doubled. Not a job lost yet

 

[JohnK]

A do what? The fact that they structured a deal such that it would comply with regulations and to make the purchase as straightforward as possible means that what they were doing is not above board?

That has to be some of the most screwy logic I have come across

Screwy logic? Dave I am really sorry if you cannot see what is really happening here.

Most parts of the deal do not add up. Private equity is conspiring to get the deal through. They are dividing up the shareholding in APA in one way and altering the voting rights in a totally different way to avoid scrutiny. To me this is dishonest and not above board. You can call it whatever you like.

It will all be clearer when the shafting starts to happen.

 

[Dave Noble]

Screwy logic? Dave I am really sorry if you cannot see what is really happening here.

Most parts of the deal do not add up. Private equity is conspiring to get the deal through. They are dividing up the shareholding in APA in one way and altering the voting rights in a totally different way to avoid scrutiny. To me this is dishonest and not above board. You can call it whatever you like.
.

No. To me it looks like they knew the major hurdles that they had to navigate and structured a plan such that it complied with the various regulatory issues. That seems extremely sensible to me and cannot see how that is dishonest at all

Dave

 

[NM]

As many may have noticed, I have remained silent on this topic for much of the debate. Actually, I have remained silent on AFF for a while, which is due to work load and nothing to do with this topic really.

But I do not see the sky falling just yet. Perhaps it will, but I don't see that as a foregone conclusion. I expect there will be changes and I will try to note them as they happen and determine if they are positive or negative changes as they affect me.

I am not a QF shareholder, but if I was one I very much doubt I would be doing any other than taking a decent profit at this time.

I have diversified my FF earnings and now use AAdvatage for all flight earning. So I really don't care much about what happens with the QF FF scheme, except that I still have a few hundred thousand QF FF points I would like to use for long-haul international upgrades sometime. If the QF product (i.e. service) drops below that of other options on the same routes, then I will consider using a different airline for travel. I already prefer to use CX trans-Pacific and now only use QF on flights I wish to waitlist for an upgrade. But that decision is based on things other than who owns the shares of the airline.

If we are going to chase the lowest possible airfares all the time, then the airlines need to cut their costs to meet that customer demand. If that means job cuts then that is more the result of customers demanding lower and lower fares and greater competition than it is due to the make up of the shareholder's register of the airline.

My crystal ball does has not yet cleared its misty view of what QF may look like in 1, 2, 5 or 10 years time. So until it is clear, I will stick with making predictions that I have some confidence will result in becoming true - so I hereby predict a 5-0 ashes series result. At least that prediction only requires about 3 weeks foresight.

 

[serfty]

Thankyou Mr Mobbs for your perspective on this. It is very similar to mine; the main difference being that I have no AA status.

My previous post in this thread was in relation to some doubts I already had. Who better to quote than a respected commentator to cast on the validity of the package; there's a real chance that if properly scrutinized the deal won't be legitimate.

 

[oz_mark]

Thankyou Mr Mobbs for your perspective on this. It is very similar to mine; the main difference being that I have no AA status.

My previous post in this thread was in relation to some doubts I already had. Who better to quote than a respected commentator to cast on the validity of the package; there's a real chance that if properly scrutinized the deal won't be legitimate.

It is actually interesting that from my reading the diversity amongst commentators matches the diversity of opinions on this board. Normally the commentators seem much more consistent in their views.

Exaclty what will happen in the future is anyones guess. I think it is a high risk gamble and may all go to custard. But not so high risk that I don't think they can pull it off.

 

[Takeshi]

Qantas takeover and the National Interest thing.

Whats with the National Intrest thing that Costello can block this sale.
I mean I havn't seen anyone that wants this takeover to go ahead except for Mr Dixon and friends $100 million thankyou very much.

So really this National intrest thing is easy, most of Australia don't want Qantas to change ownership, and with such a high debt level and such a risky industry, if the **** hits the fan, all Aussies will pay for it, so how will Costello feel then ?

This mob says they have no plans to sell assets, so how are they going to make money, Dixon has already squeezed out as much that is possible.

I am sure once everyone forgets about this, the For Sale signs will go up at Qantas Catering, Qantas Holidays, Qantas Freight, Qantas Maintance ect ect.
I wouldn't trust a Private Equity company for a second.
Dixon has always wanted to just fly planes, this is his dream come true.

Wait till staff lose there cheap travel benefits, because this will go as I am sure this costs Qantas a **** load of money in FBT, correct me if I am wrong.

Anyway I hope this takeover will not go ahead.

 

[Takeshi]

What big companies own QF Shares now ? anyone know the institutions ?

Wow wouldn't they have enough power to not vote on this ? or try to get a higher price per share.

 

[JohnK]

My previous post in this thread was in relation to some doubts I already had. Who better to quote than a respected commentator to cast on the validity of the package; there's a real chance that if properly scrutinized the deal won't be legitimate.

I am shocked! Is someone suggesting the private equity offer may not be above board?

 

[Mal]

What big companies own QF Shares now ? anyone know the institutions ?

Wow wouldn't they have enough power to not vote on this ? or try to get a higher price per share.

The top 20 will be in the latest report:

http://www.qantas.com.au/infodetail/about/investors/AnnualReport2006.pdf

Page 142 (Page 144 of the PDF) shows the following:

TWENTY LARGEST SHAREHOLDERS
Shareholders				Ordinary Shares Held	% of Issued Shares
JP Morgan Nominees Australia Ltd			481,968,046	24.65
Westpac Custodian Nominees Ltd				327,049,506 	16.73
National Nominees Limited 				239,422,337 	12.25
ANZ Nominees Limited 					130,563,224 	6.68
Citicorp Nominees Pty Limited 				85,760,116 	4.39
RBC Dexia Services Australia Nominees Pty Limited	39,054,984 	2.00
Cogent Nominees Pty Limited 				37,196,068 	1.90
UBS Nominees Pty Ltd 					21,299,328 	1.09
HSBC Custody Nominees (Australia) Limited 		21,140,681 	1.08
Australian Reward Investment Alliance 			18,451,627 	0.94
Woodross Nominees Pty Ltd 				13,987,501 	0.72
AMP Life Limited 					11,420,137 	0.58
Westpac Financial Services Ltd 				8,427,723 	0.43
Queensland Investment Corporation 			6,713,335 	0.34
Pacific Custodians Pty Limited 				5,807,393 	0.30
Merrill Lynch (Australia) Nominees Pty Ltd 		5,591,349 	0.29
Pan Australia Nominees Pty Limited 			4,460,000 	0.23
Bond Street Custodians Limited 				4,222,163 	0.22
Argo Investments Limited 				3,749,302 	0.19
Victorian Workcover Authority 				3,415,181 	0.17
							1,469,700,001 75.18

Note that some are direct investment companies (ie Argo, QIC, Vic Workcover), while others are nominees (holding trusts for other organisations)

 

[serfty]

I am shocked! Is someone suggesting the private equity offer may not be above board?

To paraphrase a column from Terry McCrann, there may be a problem with the foreign 'associated' entities ...

From Qantas fears soar too high | Herald Sun ...

Qantas fears soar too high

Terry McCrann ...

... The only 'problem', is that the bid has to 'pass muster' on two quite separate bits of foreign investment rules. The specific Qantas Sale Act and FATA, the long-standing Foreign Takeovers Act that applies generally.
...

The critical question is whether the foreign investors are associates. There are essentially three, Texas Pacific, the Canadian company Onex and 'other' - understood to cover a small group of big investors.
...

That seems to be conceding that they are associates, and so they are in effect 'one shareholder'. ...

But if Texas Pacific and Onex are associated, why not the 'other foreign'? Because if they are, the 'one' foreigner has 39 per cent, even of the reduced voting interest, and that would breach the Sale Act.

If so the takeover would be illegal and could not take place because it could not be 'approved'. ...

 

[Tooner]

Didn't we discuss earlier in this thread (or maybe the one about the FF scheme being sold) that Air Canada was privatised?

What happened there - might be a good indicator.

 

[simongr]

KiwiFlyer has mentioned it a few times. There has been some good and some bad and it all depends on personal profiles.

S

 

[codash1099]

What big companies own QF Shares now ? anyone know the institutions ?

Wow wouldn't they have enough power to not vote on this ? or try to get a higher price per share.

I wouldn't be surprised if they all took the money and ran. They would all show a handsome profit which, in the case of the Superannuation companies, would help boost their returns.

 

[simongr]

I wouldn't be surprised if they all took the money and ran. They would all show a handsome profit which, in the case of the Superannuation companies, would help boost their returns.

And help them meet their obligations to their shareholders and their clients (for the super funds that is). if they dont take the money they really need to be able to justify that thay will generate a higher return by not selling the shares - which in theory could only be via an expectation of higher future dividends or some future growth in QF's capital vlaue (which would I guess have to be driven by some expectation os significant future increase in profits).

 

[JohnK]

To paraphrase a column from Terry McCrann, there may be a problem with the foreign 'associated' entities ...

This private equity takeover is not as clear cut as it appears.

Lies, contempt, deception, trickery, greed. Someone mentioned earlier the general public is misinformed. On the contrary, we are well informed and can see very clearly.

The only realistic decision is to block this deal and replace the QF board and senior management with competent people.

 

[codash1099]

This private equity takeover is not as clear cut as it appears.

Lies, contempt, deception, trickery, greed. Someone mentioned earlier the general public is misinformed. On the contrary, we are well informed and can see very clearly.

The only realistic decision is to block this deal and replace the QF board and senior management with competent people.

Unless, of course, they accede to our reasonable demands for significant improvement in the FF scheme