Herald Sun – Qantas cleared for take-off

Geoff Easdown in the Herald Sun says that private equity bid group Airline Partners Australia would force Qantas to increase debt to provide shareholders with a $4.5 billion capital return under the terms of a rejigged offer announced yesterday.

The principal beneficiary of the payment, amounting to six times last year’s operating profit, would be the buyout partners themselves.

Bid documents show the first instalment of $2.5 billion would be paid within a year of APA taking control of Qantas.

The airline would also have to shell out a $1.5 billion dividend from retained earnings held at December 31 last year.

However a previously announced incentive scheme that would have handed Qantas’s senior managers millions of dollars in stock is on hold.

Announcing the offer, APA director Bob Mansfield said it was time for Qantas shareholders to make a decision on the $5.45 cash bid.

“In our view investors have had ample time to assess our offer,” Mr Mansfield said. “It is now time for Qantas shareholders to act.”

He blamed a minority of “vocal” shareholders for discouraging other shareholders to accept the APA offer.

“By effectively lowering that condition to 70%, shareholders can be confident that the offer will be successful,” he said.

Yesterday’s announcement ended weeks of uncertainty about the future of the $11.1 billion buyout offer, which key institutional shareholders UBS Nominees and Balanced Equity Management have blocked.

The decision to ease the key buyout condition, from 90% to 70% to overcome a deal-blocking 14% withheld by both funds, will leave Qantas listed on the share market.

However a rump of independent stockholders will remain.

APA plans to appoint two independent directors to represent them on the new board of the airline.

Allco Finance, Macquarie Bank and North American interests TPG and Onex Corp which comprise the buyout group, made no secret of their plan to load the airline with extra debt.

The stock exchange was told the airline’s gearing level would increase significantly, almost doubling to 4.3 times earnings.

The partners said their new three-year funding arrangement with their lenders envisaged capital reductions “of approximately $4.5 billion in aggregate and payment of dividends of up to 100% of retained earnings”.

“Airline Partners Australia’s proposal is that the increase in Qantas’s debt be used to fund these distributions,” the exchange was told.

Brent Mitchell, the senior aviation analyst at Shaw Stockbroking, said the new offer was likely to get the buyout over the line, but force the new Qantas board to consider the interests of the remaining few shareholders. He said it would also create a whole new set of difficulties for Qantas chief executive Geoff Dixon and his management.

Until yesterday APA had accumulated little more than 30.6% of Qantas shares since announcing the offer in mid-December.

By cutting the acceptance level to 70%, the partners are expected to mop up 40% of the airline’s shares that hedge funds have acquired since Christmas.

“This will help them get the deal over the line,” said Atul Lele, from White Funds Management in Sydney. “You will see acceptances start to increase.”

APA’s plan to rejig the acceptance level back to 70% was reported first by BusinessDaily two weeks ago.

Under the new arrangement APA will declare the bid unconditional once acceptances reach 70%, a move that guarantees shareholders who sell into the offer that they will be paid within a month.

Mr Mansfield said yesterday that he was confident of wrapping up the deal within two weeks, on May 4.

Until the announcement the deadline for acceptances was the close of trading yesterday.

With the airline likely to remain listed, at least temporarily, APA’s loans will be secured against Qantas shares rather than hard assets.

Qantas shares rose 8c or 1.5%, to $5.39 yesterday.

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Report by The Mole