International hedge funds punt on a no for Qantas APA bid

A report in The Australian today says that international hedge funds are punting that the $11 billion private equity bid for Qantas will be shot down by three key institutional investors.

Hedge fund selling yesterday helped depress the airline’s share price another 7c to $5.09 – down from a high of $5.32 on March 7 and well below the $5.40 price offered by the Macquarie Bank-led bidding consortium.

Three key investors, UBS Global Asset Management, Balanced Equity Management and Maple Brown Abbott, which hold more than 10% of Qantas stock, are believed to be uncertain about accepting the bid launched late last year by Airline Partners Australia.

The partners need to get 90% acceptances to be able to compulsorily acquire the rest of the shares and de-list Qantas from the ASX – a move that is essential to the funding of the bid.

Analysts yesterday said the battle for Qantas could be extended well beyond the current deadline of April 3, with APA yesterday announced it had conditional acceptances for 15.25% of Qantas shares, up from 13.14% last week, with analysts saying this was a disappointingly low figure, given Federal Treasurer Peter Costello’s very public statement a week ago that the Government would not block the bid.

Balanced Equity Managing Director Andrew Sisson said he had not decided whether to accept the APA offer – media reports say that he has decided to reject it.

Balanced Equity holds about 4% of Qantas stock while UBS owns around 5.5% and Maple Brown Abbott is believe to hold a smaller stake.

“We still haven’t made up our mind,” Mr Sisson said. He said it would be “a good thing” if APA increased its offer price, but he did not expect it to, given the consortium has already declared its current bid price to be final.

He added, “There is a price at which we would sell but I can’t see how they can do it (raise the price).”

He also said that Qantas should release its earnings forecasts for the 2007-08 financial year to help shareholders assess the value of the APA bid.

An ASIC spokeswoman said yesterday that it was possible under the Corporations Act for a bidder to increase its offer for a target company – even if it had declared a bid final – provided it let its original bid lapse and launched a new bid.

This would mean that it would have to launch a completely new bid at a higher price and would have to start again in counting any acceptances.

She said there was no minimum time before a bidder could launch a new bid once it let its original bid lapse.

Mr Sisson denied Balanced Equity had been approached directly by hedge funds wanting to broker a deal on the Qantas situation, but the fund had been approached by stockbrokers making offers for its stake in Qantas.

UBS, which is not making any public comment, is considered the strongest sceptic of the three institutions.

“There is some nervousness,” Shaw Stockbroking transport analyst Brent Mitchell said yesterday. “Obviously some of the hedge funds may be cutting and running.”

Mr Mitchell said it could take another two or three months for the deal to be sorted out and that he was advising retail clients who were thinking of selling into the bid not to accept early, as this would limit their flexibility.

Mr Mitchell said he now gave the APA bid for Qantas a 50-50 chance of succeeding, down from his estimate of 60-40 last week, adding, “There is a change in sentiment and the hedge funds have seen it”.

Southern Cross Equities Head of Institutional Dealing Charlie Aitken said he did not believe APA would get to the necessary 90% acceptances to complete the deal, adding, “I believe the fund managers who have expressed their concerns on the deal mean what they say and I also believe that many retail investors won’t accept it.”

“It is not an issue of not wanting to sell out to private equity.”  “If they sell they will have to pay capital gains tax.”  “There is strong growth potential and shareholders enjoy high fully franked dividends.”

“We believe their earnings forecasts for 2008 – if they were to be released – would be a good one.”

Report by The Mole from material from The Australian