Qantas: puzzler for hedge funds

A report in the Australian Financial Review today says that hedge fund investors in Qantas are sitting on a loss of about $75 million based on yesterday’s closing price, which explains some nervousness about the fate of Geoff Dixon’s management buy-out.

The AFR goes on to say that the Qantas deal was always going to be a landmark event for private equity in this country, and there is a lesson in the warning bells ringing around arbitrageurs who blindly assumed the deal among others like Flight Centre would be approved.

The UK Takeovers Panel requires all bidders for a public company to get the same information.  In Australia, it’s more an issue for board discretion, but no one has come up with a solution to the problem that the sellers (the Qantas shareholders) have less information than the buyers.

The Qantas team is working through options to address this issue while protecting the board’s backside against a potential litigation for profit forecasts some 18 months hence.

Any such projections would be almost revolutionary in concept, but while not all in the Qantas camp support the move, it would not surprise if some compromise emerged.

The bid was always promoted on price alone, but now that that is being questioned, Dixon’s team needs to explain itself better to remove the perception that it’s a giant ruse to generate buckets of fees for all concerned.

Qantas chairman Margaret Jackson, having held the moral high ground, will want to keep it, which explains why some sort of profit projection will be released.

While the moral arguments are being waged, hedge funds are laying their bets with increasing puzzlement.

Obviously, some funds are ahead and some are behind. The $75 million loss figure is based on the 1.86 billion Qantas shares sold since November 22 (when news broke about the deal), the average price since then of $5.19 a share, and an assumption that 40 per cent of the stock has gone to hedge funds.

The turnover is almost as big as the total number of shares on issue, which is 1.98 billion. Included among the sellers are some of the biggest holders who have obviously taken the same view on the price on offer as Jackson and the board did.

Capital has sold down from 13 to 4%, shedding some 178 million shares for circa $923.8 million, and Franklin has reduced its stake from 8.5% to about 2%, selling some 129 million shares for circa $670 million.

Not everyone takes the same view, which is why there is a public equities market and UBS and Balanced Equity Management have yet to decide their position.

Maple-Brown Abbott has reportedly sold some 60% of its holding, reducing it from about 4% to under 2%. On face value, this would suggest it, too, has spoken with its feet, but outsiders are not privy to why MBA might have sold its stake or whether it is part of some futures arbitrage, which may imply a completely different story.

The point is the Qantas battle is coming to the pointy end, with those with the strongest beliefs still at the table.

The Qantas sale teams including UBS, Carnegie Wylie and Allens Arthur Robinson have a large portion of the $96 million in potential fees from the deal at risk.

While Jackson can sleep at night, knowing whatever happens she at least has done the right thing in putting the deal to shareholders to decide, in her oversensitive moments she may treat rejection of the deal as a slap in the face for her judgement.

Dixon is at pains to say he can happily get on with life without all this nonsense, but he passionately believes in Qantas and that it is in need of a revolution to prosper long term, so he wants the deal to happen.

He and finance chief Peter Gregg have long believed the market has undervalued the company, so even though some fund managers believe they have managed the revolution superbly, it’s management, not investors who have lost faith in the public market.

It is too early to predict what happens to the deal, but if it fails, it will be wrenching for the company as management is entwined in the deal, and Canberra will certainly look at Qantas in a different light from this day hence, having been subjected to what the government thinks is a political loser for it.

Report by The Mole from material from the Australian Financial Review