Serious Questions for Qantas directors on raid

Business opinion leader Robert Gottliebsen, in a report in The Australian this morning, reviewing the potential sale of Qantas makes some very relevant comments and asks some very leading questions.

This is a transcript of his report: –

Before making a recommendation to Qantas shareholders on the private equity raid on the company, each Qantas director needs to answer at least four and possibly eight questions.

They are not easy questions, but the Qantas board is one of the best in the country so is well able to handle them. The questions are:

1. Can Qantas CEO Geoff Dixon and his top management succeed with their radical plan to reshape Qantas?
2. If they succeed, what would the Qantas enterprise be worth?
3. Are the private equity raiders right that the Dixon plan is so lucrative that they can pay around $5.50 a Qantas share and still gain an annual 20 per cent compound annual return – much more than the short-term focused share market thinks possible?
4. Is it only fair that Dixon and the top Qantas management be rewarded for this plan on the scale proposed by the private equity raiders? It is simply not possible for a conventional public company to reward them at this level.

If the directors conclude that chances are that the Dixon plan will not succeed and that nothing like a 20 per cent cumulative annual return is likely for the private equity raiders, then Qantas directors should grab the $5.50 a share and strongly recommend the bid.

If they conclude (like the private equity raiders) that the Dixon plan will succeed and that high returns (based on $5.50 a share) are likely to follow, then Qantas directors have to ask themselves four more questions:

1. Should not the full Dixon plan be explained to shareholders along with its potential rewards?
2. Are the directors prepared to accept the painful personal vilification that will follow the rejection of an offer of $5.50? Already institutions – which could not care less about any long term plan – are briefing any journalist who will listen that it would be silly to reject around $5.50 a share.
3. Why should I, as a Qantas director, act in the interests of the long-term interest of shareholders when the institutions who manage Australian savings could not give a damn about it? All they are interested in is the next six months and their bonus.
4. Should Qantas directors explain to the Government that Australian majority ownership of a corporate vehicle that is borrowed to the eyeballs is very different to one that is not highly leveraged?

The shareholders and management will be subject to effective overseas bank monitoring with a degree of control. It will always be possible that there will be a global disaster and if that happens the Dixon plan will fail. In that case, control of Qantas will be fully vested in overseas banks.

My guess is that given the high calibre of the board, if they believe the Dixon plan offers excellent long-term rewards based on a $5.50 a share base they will answer the final four questions in a way that reflects their standing in the community.

Apart from Geoff Dixon and chief financial officer Peter Gregg, Qantas directors who must answer these questions are:

* Paul Anderson (director and former CEO of BHP Billiton);

* Mike Codd (former head of the department of the Prime Minister and Cabinet);

* General Peter Cosgrove (former Chief of the Australian Defence Force);

* Patricia Cross (Wesfarmers and National Australia Bank director);

* Garry Hounsell (former senior partner of Ernst & Young and chief executive of Arthur Andersen);

* James Packer (executive chairman of Publishing and Broadcasting);

* Dr John Schubert (chairman of the Commonwealth Bank and director of BHP Billiton; and

* James Strong (former chief of Qantas).

The Dixon plan involves at least five elements:

* Much greater efficiencies at the base Qantas operation;

* A dramatic widening of the Qantas freight operation, eventually turning it into a separate public company;

* Expanding Jetstar fourfold or fivefold;

* Expanding the engineering section to take on more non-Qantas work;

* Expanding Qantas Link as a separate business; and

* Dealing with service providers on the basis that in time Qantas can go to another provider.

Report by The Mole from material from The Australian