Qantas directors must tell shareholders how the game has changed

A report by Terry McCrann in The Australian last week says that APA has made it crystal clear it wants to buy as much of Qantas at $5.45 as it possibly can.

Absolutely preferably 100%, but anything over 70% the bidding group can get its collective hands on.

And why wouldn’t it?  You certainly would. Getting to buy shares today at last December’s levels, with share prices generally up 10% since then.

Indeed, the market as measured by the S&P/ASX 200 index is up 15% since APA first approached Qantas in November.

True, the board did get them to increase their initial offer – by all of 10c, or 2%.

The performance of the board, led by Chairman Margaret Jackson, has been less than impressive.

Captured in its woefully inadequate response to APA’s proposed change to its minimum acceptance condition.

The statement, which was not signed by Jackson or any substitute director but by the “acting company secretary”, lamely “confirmed” the recommendation by the non-executive directors that shareholders accept the offer in the absence of a superior proposal.

The Qantas statement merely noted without comment that if APA succeeded with its offer but fell short of 90% it would appoint all of its non-independent directors to the Qantas board and two directors “who will be independent of Airlines Partners Australia”.

It made no reference, not even just to note, that APA now intends to extract $4 billion from Qantas within 12 months if it gets to partial ownership control. 

This has huge significance for both Qantas’s operational and investment metrics and it completely changes the metrics for any continuing shareholders.

They would get $2 a share back, and arguably continue to hold a share worth as much if not more as an existing Qantas share.

Albeit one that would be riskier because of greater debt in the company.

Apart, of course, from utterly shredding the argument by Jackson and CEO Geoff Dixon that Qantas’s biggest challenge was getting money into its balance sheet to finance its $13 billion aircraft re-equipment program.

Not a single word on this, far less the possible implications for not accepting over accepting.

Now the Qantas directors might be desperate to just “get out of the boardroom” as quickly as possible, figuratively speaking, but they are still responsible for the company and to its shareholders until they are formally departed and this is completely unacceptable.

The offer before shareholders has changed fundamentally, with before Thursday it was all-in or nobody-in at $5.45 a share, but now there is every prospect that Qantas will continue as a listed, partially owned subsidiary of a highly leveraged APA.

Further, it might reasonably be asked: how has Qantas itself changed?

It is now exactly one full month since the board reluctantly, indeed petulantly, disclosed a significant improvement in Qantas’s financial performance.

At the February 8 interim profit, Qantas had anticipated a full-year result for 2007 around “30 to 40% higher” than the 2006 result.

Just five weeks later, it said the full-year result was “likely to be towards the upper end of this range”.

Incredibly, in two different ways, the Qantas statement actually said the information was only being disclosed “in response” to media commentary and questions from “certain investors”.

Actually, major shareholders which for some unaccountable reason thought they were entitled to know.

Incredible that the Qantas board saw no obligation to keep its shareholders informed; and incredible that it actually said as much in a press statement.

Well, one month on it has an obligation to update current performance and expected performance.

It now has the full March-quarter numbers in – it didn’t a month ago; and should pretty much have locked in the full year, subject, of course, to uncallable left-field events.

It hardly needs stating that Dixon, who is a member of the bidding group, has this information and this is not to suggest any impropriety by him; his integrity is impeccable, just simply that everything he knows about Qantas’ performance which is relevant to assessing whether or not to accept the offer, every shareholder is also entitled to have in making that decision.

Indeed, arguably, the Qantas board should now go further.  It should ask APA to give those shareholders who have already accepted the offer the option of taking their shares back because the offer has changed so fundamentally.

And, failing APA’s willingness to do so, to go to the Takeovers Panel.

APA has “acceptances” for about 30% of Qantas and clearly hopes to rush to 70% by “encouraging” the hedge funds, which hold around 40%, to accept.

The hedge funds have no real interest in Qantas’s long-term share price; they are structured to make a 30-50c turn on trading, so the quicker APA gets to 70% the better they will like it.

Now “acceptances” is in quotation marks because only 12% is formal acceptances, almost entirely from small investors, with the other 18% or so is in what’s called the Institutional Acceptance Facility.

It’s committed to accepting but the instos could take their shares back.

Very, very interestingly, it’s possible instos could take their shares back after APA commits to going unconditional – assuming it has the 70% with those instos’ shares – thereby taking it back below 70% when the offer closes!

Whatever, they can look after themselves and make their own decision, whether they still want to take December’s $5.45 or stay with a listed Qantas or whether one controlled by APA or just as it is now.

Small shareholders need guidance from their directors……and protection.

Now clearly APA hopes to stampede not just the hedge funds but all the other shareholders and in particular the two main recalcitrants, Andrew Sisson and his Balanced Equity and Paul Fiani of UBS, into accepting, so that it gets to 90% and makes a multi-billion-dollar fortune.

But if they resist it could finish with 70-90% and it will have to, have to, make another offer in one or at most two years’ time.

Ironically, the best outcome for the recalcitrant duo is for APA to be swamped with acceptances, with  the more shares it gets at $5.45, the higher the price they will be able to extract in that second offer.

Alternatively, the offer falls over and if so, APA will almost certainly come back at a higher price, because it has too much invested in this play, not just the tens of millions it has already spent but the billions it can reap both from owning Qantas and the deals its member partners intend to do with the airline.

In my opinion it would have to be at least $6, ex the normal dividend for the current June half.

Report by The Mole from The Australian