The Airline Partners Australia consortium bidding for Qantas has decided to get tough with hold-out shareholders, threatening them with the prospect that the airline would cut the value of their shares by increasing debt to return $4 billion to shareholders within a year of taking control of Australia’s biggest airline.
In a supplementary bidders statement issued to the ASX detailing a new funding arrangement late yesterday, APA says the payment, which would be six times last year’s operating profit, would be funded by a “significant” increase the airline’s debts.
It is a crude attempt by the Macquarie Bank-Allco Finance led group to stampede hold out shareholders, led by big investors, balanced equity and UBS Asset Management, into abandoning their opposition and accepting the $5.45 a share offer from APA. (There’s a good report on the Sydney Morning Herald website which reveals the crudeness of the APA approach).
The threat to return capital, if carried out,would enable APA to repay itself the $3.5 billion in capital it is putting into the offer, plus a profit of half a billion dollars. Around $7 billion in debt would remain and Qantas would be dangerously short of capital.
It seems the threat of higher debt and the volatility of the global airline industry is being used to ‘encourage’ shareholders who oppose the bid into accept the $11.1 billion cash offer that many believe undervalues Qantas.
There are more warnings about the state of the aviation market and higher competition here and overseas.
But there is no mention of Qantas’ improving financial position nor the three profit upgrades.
As well APA said it would appoint two new independent directors to the Qantas board once it got to 70 per cent, in addition to the existing disclosed appointees, who would vote according to what it wanted.
The new terms were issued as part of the statement which revealed that Macquarie and its partners also won agreement from the bankers tolower the minimum acceptance condition from 90 per cent to just 70 per cent of the stock accept, neutralizing the threat that minority shareholders will defeat the takeover.
The bankers to the bid have agreed to the lower terms and will take security over the Qantas shares instead of its assets. It is felt the lowered acceptance condition andextension of the bid to May 4 will force shareholders to accept the $5.45 a share offer.
APA will keep the original 90 per cent bid structure in place in the expectation it will reach this level and enable it to abandon the more expensive offer with the 70 per cent (or more) limit.
Some investors now wonder if the lowered acceptance condition and the threat of the dividend constitute such a change in conditions that a completely new bid will be required. It is something to monitor in the days ahead.
Under the threat of the increased borrowings the ratio of Qantas’s net debt to its earnings before interest, tax, depreciation and amortization will triple to 2.8 times under the buyout group’s new plans.
The takeover of the Sydney-based carrier had looked likely to fail after holding about 10 per cent of the company indicated they would reject the bid.
Macquarie and its allies including, TPG Inc, (formerly known as Texas Pacific Group), are prohibited from raising their offer price under Australian takeover law because they foolishly declared it to be a ‘final’ offer price of $5.45..
Shareholders accounting for 30 per cent of Qantas shares have accepted the APA offer and hedge funds are said to account for another 40 per cent, so the bid looks home and hosed.
Qantas shares jumped 8 cents to $5.39 at the close of trading yesterday.
The bad temper between Qantas, some of its shareholders and APA means that relations will not be the best when the buyout group comes to cash in their opportunistic bid in three to five years time.
Although time and the prospects of big profits can heal many wounds, the mistrust and unease the tactics of APA has caused (and the conflict of interest at the management and board level of Qantas) means the refloat of the airline will be greeted sceptically.
APA is likely to get full control of the airline without the need to use the new package.
Qantas immediately fell into line with this statement late yesterday:
“Qantas refers to the announcement made today by Airline Partners Australia that it will declare its takeover offer unconditional if it receives acceptances of 70% or more (including instructions under the Institutional Acceptance Facility) and notes that a Supplementary Bidder’s Statement will be sent to all Qantas shareholders.
“The Non-Executive Directors confirm their recommendation that Qantas shareholders accept the offer by Airline Partners Australia in the absence of a superior proposal.
“As set out in the 7th Supplementary Bidder’s Statement, if the takeover offer is declared unconditional, Airline Partners Australia intends to procure that its nominees are appointed to the Board of Directors to replace all current Qantas Non-Executive Directors, and in such circumstances the Qantas Independent Directors would retire from the Board.
“Qantas notes that if Airline Partners Australia declares the offer unconditional and closes the offer with less than 90% of Qantas shares it intends to appoint to the Board of Directors all of the non-independent directors who are then on the board of Airline Partners Australia and two directors who have not yet been identified who will be independent of Airline Partners Australia. Further details are set out in the Supplementary Bidder’s Statement prepared by Airline Partners Australia”.
They know where the cash will fall.
