Qantas bid 'fair' but APA needs tail wind, says expert

The Australian AVIATION, February 13, 2007


Steve Creedy, Aviation writer


AN independent report into the $11.1 billion private equity bid for Qantas has warned that the airline's would-be new owners will need "a following wind in a volatile and difficult industry" as they attempt to generate a high return on their investment.

But valuer Grant Samuel yesterday lent its support to the Qantas board's recommendation that shareholders accept the $5.60 per share offer by Airline Partners Australia (APA), saying it was "fair and reasonable".

The firm said the offer fell within an estimated range of the the airline's full underlying value of $5.18 to $5.98 per share and warned the price would probably fall back to $4.20 a share if the deal fell through.

The bid's biggest hurdle remains political and public disquiet about delivering Australia's biggest airline into the hands of private investors and the amount of debt the deal involves.

APA officials met yesterday with backbenchers in Canberra to answer questions and are expected to meet Transport Minister Mark Vaile later this week.

APA spokesman Bob Mansfield said the $5.60 offer was above the mid-point of the independent expert's valuation range.

"Airline Partners Australia's offer for Qantas is a full and fair price that cannot and will not be increased in the absence of an alternate proposal," Mr Mansfield said.

Grant Samuel noted that a fundamental question for shareholders was whether Qantas shares could reach the $5.60 offer price in the foreseeable future.

While this was possible at some future date, it said it would require "a confluence of favourable outcomes".

These included a continuing strong global and Australian economy, no irrational fare cutting by competitors on key domestic and international routes, the further development of Jetstar International and "significant cuts in operating costs, primarily staff". There would also need to be no material rise in fuel prices or other external shocks such as significant terrorism events or pandemics.

"Having regard to the time value of money and, more importantly, the execution risks of strategic plans and other risks inherent in the business, shareholders are likely to be better off accepting $5.60 now rather than waiting for the market price to possibly rise to these levels over time," the report said.

The report said APA might achieve high returns on its investment but in addition to needing a tail wind, this would involve financial leverage, lifting financial risk to levels unlikely to be acceptable to public company investors.

Higher returns could also result "from future actions that could be difficult to achieve in a publicly listed company".

Unions interpreted this to mean an attack on worker pay and conditions and increased use of the Howard Government's Work Choices legislation.

Qantas chairman Margaret Jackson has said "the offer is the best available option to enable Qantas (shareholders) to realise significant value for their investment".

The Board's endorsement of the deal was expected and shareholders have until march 9 to accept, although APA has indicated it could extend the acceptance date if a Foreign Investment Review Board inquiry makes that necessary.