Raiders to gouge $4b from Qantas

In this dramatically titled front page report in The Sydney Morning Herald late least week, Scott Rochfort, said that Airline Partners Australia consortium bidding for Qantas plans to gouge $4 billion out of the airline within the first year of its takeover succeeding.

Confirming suspicions the Macquarie Bank and Texas Pacific Group-led group is set to make a killing from the purchase, the consortium revealed yesterday that it planned to pay $1.5 billion in dividends and a $2.5 billion capital return within 12 months of gaining control.

“Airline Partners Australia’s proposal is that the increase in Qantas’s debt be used to fund these distributions,” it said in a statement to the sharemarket.

The consortium was forced to disclose details of its so-called capital management review because under the revised bid announced yesterday the company will remain public.

Qantas shares surged on signs the bid was all but certain to proceed given that the previous condition requiring it to acquire 90% of the airline has been lowered to 70%.

This will allow the consortium to sidestep shareholders holding out for a higher offer and it has already gained acceptances from more than 30% of Qantas’s 140,000 shareholders.

In a final push to get the deal over the line, the spokesman for the consortium, Bob Mansfield, highlighted to Qantas’s remaining shareholders the competitive threats the airline faced from Middle Eastern airlines and the pending entry of the Singapore Airlines-backed Tiger Airways into the domestic market, adding, “The threats were considered theoretical at the time the offer was announced.”  “They are now very real,” Mr Mansfield said.

He failed to mention that Qantas has had three profit upgrades since speculation of the bid first surfaced, and that Qantas aircraft are the fullest they have been since the airline was sold by the Keating government in the mid-1990s.

Qantas is still on course to post a record full-year profit, despite the recent rise in oil prices, thanks to record passenger demand and cost cuts.

Given the consortium’s bid is now contingent on receiving 70% of Qantas, Mr Mansfield said the sooner remaining shareholders accepted the offer the better.

But the consortium played down its plans to strip $4 billion off Qantas’s balance sheet, with Texas Pacific’s Australian boss, Ben Gray, saying it was “important to note” the amount was a fairly small proportion of the $11.1 billion of funds being put into the airline.

Based on Qantas’s $5.45 share price, the dividend and capital return would work out at $2.23 a share, or 36% of the offer price.

Mr Gray also failed to highlight that the members of the private equity consortium had raised only $3.5 billion of their own money and $7.6 billion of debt to fund the $11.1 billion takeover.

This means members of the consortium – Allco Equity partners, Texas Pacific, Macquarie, Onex and Allco Finance – could get all of the $3.5 billion they stumped up within the first 12 months of the bid succeeding.

The debt raised to fund the deal will ultimately have to be paid off by Qantas, not the consortium that borrowed the money.

The consortium can take the airline private only when it has secured 90% of the airline’s shares.

In a further worry for Qantas’s 37,000 employees, apart from a handful of senior executives set to reap tens of millions in incentive payments from the consortium, Airline Partners Australia said any changes in industry conditions “may impact Qantas’s and Airline Partners Australia’s future activities and strategies”.

Report by The Mole from The Sydney Morning Herald