APA restructures Qantas bid

A report in the Sydney Morning Herald by Stephen Bartholomeusz and in other media say that APA has managed to restructure its $11 billion bid for Qantas with just enough breathing space to keep the prospect of gaining control of the airline alive and with the bid scheduled to close on April 20, APA has until Thursday to announce whether it will again extend the offer or allow it to close.

The SMH goes on to say, a simple extension would have been pointless, given that the flow of acceptances to the offer has completely stalled, without the consortium renegotiating its funding package with its banks.

Nearly a fortnight ago APA notified the ASX that as of March 23 it had received acceptances for about 11.7% of Qantas and held a further 18.4% within its institutional acceptance facility, for a total of 30.06% and it hasn’t lodged an update since, signalling that it has added less than 1% to the total.

The reason for the abrupt halt in what had been a solid stream of acceptances until that point is obvious, with on March 23 Balanced Equity’s Andrew Sisson announcing his firm would not be accepting the APA offer for its 4% of Qantas and while his counterpart at UBS Global Asset Management, Paul Fiani, hasn’t formally declared his hand, APA is resigned to the near certainty that he too will reject the offer for his 6% or so of Qantas, making it impossible for the bidder to achieve its 90% minimum acceptance condition.

After the Sisson announcement, retail acceptances simply stopped and there has been no net increase in the number of shares in the institutional acceptance facility, with the market coming to the obvious conclusion that the bid, as it was presently structured, could not succeed.

But since Sisson’s statement, APA has renegotiated its funding package with its banks and equity investors to enable it to lower its minimum acceptance condition, possibly to 80% to reduce the leverage Sisson and Fiani have over the fate of the offer.

With Qantas pressuring APA to either restructure the bid or walk away, a revised bid, if there was to be one, would almost certainly come this week with APA unable to increase the price, having declared the offer final, which makes a lowering of the minimum acceptance condition the only obviously available option to keep the bid alive.

The theory around lowering the threshold at which the bid becomes unconditional, possibly to as low as 70% but more likely 80%, is that with more than 40% of Qantas’ capital now in the hands of hedge funds and index funds APA could move quite quickly to control and potentially to 100%.

There are those in the APA and Qantas camps who believe that if APA were able to move rapidly to around 80 to 85%, Sisson, Fiani and other holdouts would find themselves under pressure because of the limited liquidity in the market for Qantas shares.

They conclude that, perversely, lowering the minimum acceptance level could improve their prospects of achieving 100% ownership.

But they may be misreading Sisson and Fiani, neither of whom appear fazed by the prospect of being locked in as minorities with minimal liquidity in an APA-controlled Qantas.  Indeed, they are both astute enough to understand that the more acceptances APA gets, other than their shares, the more leverage they will have and the earlier they are likely to be able to exploit it.

The restructuring of the bid APA has been negotiating with its bankers and shareholders creates a fundamentally different bid structure and concept to the existing offer.

Under the original plan, Qantas’ assets and cash flows would have provided security for the lenders to what would be a highly leveraged structure – Qantas would be geared 75:25 after the acquisition debt was added to Qantas’s $5 billion of net debt.

As part of the funding arrangements, APA planned to leave $2 billion of cash in the airline’s balance sheet and had negotiated a “covenant lite” debt package to insulate the group from any financial turbulence. The equity providers were putting up $3.6 billion.

Under the Plan B negotiated with the lenders, the debt providers’ security would be Qantas’ shares rather than its assets and neither the lenders nor the equity providers would be able to directly gain access to Qantas’s cash flows.

If they wanted to upstream the cash from the expected sale and leaseback of Qantas’s fleet, or shift value from the company to its financiers, it would have to be done in a way that treated the holdouts equally with APA.

That’s inefficient and complicated and more risky for everyone.

APA negotiated a remarkable deal with the banks last year but the deal it has been negotiating in recent weeks won’t be as remarkable.

The cost of the debt, the terms on which it is provided and the proportion of equity in the structure that the shareholders will have to subscribe will rise.

Thus the structure and economics of a bid that closes with 80 to 85% of Qantas are less attractive than the original concept, with the anticipated changes reducing the returns to the equity participants.

Given how far APA has come, how close to success it is and the amount of time, energy and money it has invested, control of Qantas would appear a better outcome than allowing the offer to fail.

It may also be that APA sees its Plan B as a transitory phase, because if it can obtain something above 80% of Qantas with the current bid, it could close the offer, wait a few months or so and then make Sisson and Fiani an offer too good to refuse.

It’s cheaper to pay a premium on 15% of capital than it is to increase an offer being made to all shareholders and Sisson and Fiani would see a second-round offer as one of their early exit options and the new structure could then be collapsed back to its original form, with cheaper debt and less equity and a return on equity more in line with private equity norms.

Report by The Mole from material by Stephen Bartholomeusz in the Sydney Morning Herald