Bidder CVC queries Skywest accounting
Fri "The Australian"
Bidder CVC queries Skywest accounting
Geoffrey Thomas
October 08, 2004
A WAR of words has broken out between the Singapore-based Captive Vision Capital and Perth-based regional Skywest Airlines over the airline's maintenance accounting policies, as CVC's long-running bid for control of the airline appears to be gaining ground.
The new acceptances of the CVC offer, which is priced at 20c, come as Skywest tries to fight off the takeover by wooing its shareholders with a 3-for-1 rights issue and possible listing on the share market.
The Skywest rights issue, its fourth capital raising since December 2001, is at 21c per share.
Skywest, which operates five 46-seat Fokker 50s and three 96-seat Fokker 100 jets on regional routes in Western Australia, lodged its prospectus for the share and option issues with the Australian Securities & Investments Commission last week.
The hostile CVC takeover bid was launched in mid-April and reached 30 per cent before being halted by the Takeovers Panel in August after Skywest sacked its chief financial officer Craig Lovelady over alleged email communications with CVC.
However, after CVC presented fresh evidence to the Takeovers Panel in September, CVC was cleared to proceed with its bid on condition that it issued a supplementary bidder's statement detailing all information obtained from Mr Lovelady.
CVC was also directed to offer those shareholders it had won over the right to claw back their shares.
CVC became Skywest's largest shareholder in last year's capital raising.
The latest barney centres on Skywest's most recent prospectus, with CVC questioning the revised accounting practices adopted by the airline.
In a letter to Skywest shareholders, CVC has pointed to Skywest's "change in accounting policy of capitalising (to the balance sheet) costs associated with major engine, undercarriage and airframe checks".
According to CVC, which is a listed company on the Singapore Stock Exchange, the Skywest capitalising practice "may give the appearance of an accounting profit, but in reality Skywest has made payments in cash for these expenses".
In the letter to Skywest shareholders, CVC said that if Skywest had expensed these costs, then its projected 2004 profit of $700,000 would be a reported loss of $2.20 million.
That assertion was rejected by Skywest managing director Scott Henderson.
He said: "The statements made by CVC are simply incorrect and mischievous. Skywest is very comfortable with the accounting treatment of maintenance in its financial statements. The accounting treatment is industry standard for an airline such as Skywest, and has, naturally, been signed off by our auditors and investigating accountants.
KPMG – auditors to both Virgin Blue and Qantas – provided written advice to the Skywest board that any other policy would contravene accounting standards.
"Skywest fully described its accounting policy for maintenance in its 2003 prospectus, 2003 annual report and 2004 annual financial report – all of which have been lodged with ASIC. Further, Skywest has undertaken three audits, two investigating accountant reports and one independent expert report, which all accepted the accounting treatment."
The practice of capitalising maintenance has the effect of giving a short-term profit gain and moving the balance sheet costs out, but the maintenance is still a burden on cash flow.
Yesterday CVC announced it had lifted its voting power to 34 per cent in Skywest as at October 5. Acceptances close on October 18.
CVC chief Jeff Chatfield told The Australian he was "delighted with the increasing acceptances". But Mr Henderson has a different perspective on the state of play.
"CVC's bid is opportunistic and does not, in the directors' opinion, offer fair value for shareholders," he said.
"We have been advised there has been active trade in Skywest securities – not to CVC, but to others very keen to support the company, and, we understand, at prices exceeding that offered by CVC."
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