This was published 15 years ago
Near miss almost tipped Qantas into oblivion
IT WAS the $11 billion mega-deal that promised blue skies ahead for all involved. But its failure by the slimmest of margins exactly two years ago has saved not only Qantas, but billions of dollars of debt finance
By Adam Schwab
IT WAS the $11 billion mega-deal that promised blue skies ahead for all involved.
But its failure by the slimmest of margins exactly two years ago has saved not only Qantas, but billions of dollars of debt finance - supplied by foreign and Australian banks - which would have likely been lost had the private equity-led Airline Partners Australia bid succeeded.
Tourism may also have suffered. The privately owned airline would have taken the axe to unprofitable routes.
The APA consortium - consisting of Texas Pacific Group, Macquarie Bank, Allco Finance and Onex Partners - managed to garner acceptances for only 45.7 per cent of Qantas shares by the close of the takeover. APA would have reached the 50 per cent threshold but for a US billionaire, Samuel Heyman, who over-slept and submitted acceptances for his 4.9 per cent stake in Qantas a few hours too late.
The audacious takeover landed at the zenith of the frenzy in mergers and acquisition. As 2006 drew to a close, the private equity and sharemarket boom was in full swing. Debt was plentiful as companies were encouraged to "gear-up" their balance sheets to boost returns for shareholders.
In this environment one of the largest private equity players, Texas Pacific Group - whose founder, David Bonderman, turned a $US66 million investment in Continental Airlines into a profit of more than $US600 million - decided to team up with Macquarie Bank and Allco Finance.
One of APA's trump cards was its plan to retain Qantas's senior management team. They would oversee a multibillion-dollar capital investment program over five years, along with the introduction of 70 planes to increase capacity by 40 per cent.
Based on the $5.45 a share offer, the acquisition would have cost APA about $10.8 billion. Of that, the consortium had secured commitments from lenders to provide senior secured term facilities worth $US6.1 billion.
APA members would have tipped in some $3 billion in equity but the bidder's statement noted that the company planned capital reductions of about $4.5 billion and the payment of dividends up to 100 per cent of Qantas's retained earnings during the term of its ownership.
The onset of the global financial crisis has turned what looked to be a marginal takeover proposition into what would have been a diabolical mess. To carry out the buyout, APA had planned to assume a debt burden of more than $10 billion. Two years later, Qantas's current market value is $4.6 billion.
But even before APA's mooted capital investment program, courtesy of the company's expanded debt load, Qantas would have been hemorrhaging about $1 billion a year in interest payments alone. Coupled with its expected operating losses, it is highly unlikely the private equity consortium would have been able to meet its financial obligations
Lenders to the consortium included Morgan Stanley, Citigroup, Deutsche, Goldman Sachs, Royal Bank of Scotland and Greenwich Capital Markets: a who's who of the financial crisis.
In its bidder's statement, APA confirmed binding commitments from lenders for $10.7 billion. The financing package even contained a provision for Qantas to "to make interest payments in kind, in lieu of cash".
Little wonder there is a feeling the lending consortium dodged a bullet. But APA's banks are not the only ones breathing a sigh of relief.
The consortium also included equity participation from 11 Qantas managers, including former chief executive Geoff Dixon, former chief financial officer Peter Gregg, the recently retired human resources boss, Kevin Brown, and the current Qantas chief executive, Alan Joyce.
Under the participation agreement, management would have used limited-recourse loans to acquire "time" and "incentive" based shares under a long-term incentive share plan, representing up to 4.5 per cent of the company.
Given Qantas's subsequent financial performance, it is almost certain the equity instruments granted to senior management would have been worthless.
Fortunately for Dixon and Gregg, not only did the bid fail, but the Qantas board graciously offered them significant retention payments, primarily in the form of Qantas shares, to remain with the company. These made Dixon the highest-paid airline executive in the world in cash terms before his retirement at the end of November. In 2007-08 he received $11.9 million, which included his $4.5 million retention payment.
The retention payment to Dixon involved the allocation of 1 million free Qantas shares. The stock was notionally subject to a 10-year holding lock, but Dixon was still able to sell all the free shares within two years.
Allco, of which APA's main spokesman Bob Mansfield later became chairman, has slipped into administration, crippled by its own debt burdens and controversial related-party transactions involving its founder, David Coe, who was also at the forefront of the Qantas takeover.
Had the APA bid succeeded, Allco would have held an 8.4 per cent economic interest in Qantas, while its listed offshoot, Allco Equity Partners, would have owned 25.9 per cent. AEP, a separate ASX-listed entity, has since run a mile from Allco and wants to change its name to Oceania Capital Partners. Macquarie, of course, has survived and moved on, albeit having just experienced a rough year in which its profits halved.
The previously invincible Texas Pacific Group has also had a difficult patch. It headed an ill-fated equity injection into US bank Washington Mutual last year that led to losses of $US1.3 billion for the group.
And Qantas? While its shares rose shortly after the takeover failed, reaching $6.06 in December 2007, it has since fallen to $2.13 - 60 per cent less than the APA offer price after fuel prices and then the global recession shredded its bottom line.
It faces a second half loss in its current financial year. As a result, Joyce has said 1750 Qantas workers will lose their jobs.
But one suspects that had the APA bid succeeded, far more Qantas employees would be seeking work, there would be some very sorry financiers, several far poorer former Qantas executives and most likely a renationalised icon.
Adam Schwab is a corporate lawyer.