APA Qantas Bid Strategy

[YesTAM]

Moderators can roll this into the other thread if they like.

I've been trying to understand the strategy behind the Qantas privatisation via the APA bid because initially it didn't seem to make sense, but now I think it does, and I thought I might try and explain what I think it is and why its very cunning and probably going to result in the players laughing all the way to the bank, and its all perfectly legal of course.

What we know, without too much research, is that APA is going to pay about 9 - 11 billion odd for Qantas, about 3.5 billion is equity, the rest borrowed. The actual figure depends on acceptances.

Once acquired, Qantas is going to be "recapitalised", that means it is going to sell every asset it can and take on as much debt as it is able. The cash freed up will then repay APA. The figure suggested in the Australian this morning was $4.5 billion.

Now if APA can get this far, and depending on the relationship between debt holders and the APA people, much of the 3.5 billion in equity APA put in will be repayed, in fact if all of the money went to the APA equity holders, then they would be one billion dollars in front.

I'll leave out the question of exactly how much APA can pay itself by "recapitalising" Qantas. That depends in part on how good the share markets valuation of what Qantas is worth is. If there is a 'surprise surprise" moment and the value of the Qantas assets sold is much higher than the market expected, then the APA bidders are home free. Conversly if the value is less than what APA calculated when bidding then the existing Qantas shareholders are laughing.

It's a bit like selling an old car covered with mud and rubbish, you think you are selling an old Holden, but when the new owner polishes it up...well surprise! Its actually a very rare and expensive Monaro!. My guess, and it is only a guess, is that the stockmarket undervalues Qantas because of the prudential requirements of the Stock Exchange and the ACCC - they require the company to report conservatively.

I guess that begs the question of why the present Board couldn't change that perception, but then again, in the face of an offer like this, why would they try? In addition, we have had years of the Board and management telling us that Qantas is "under threat". Given that they have been making billion dollar profits year after year, I keep wondering how much money is squirrelled away in the old accounting "hollow logs" (like depreciation charges) that many companies use to keep their profits adequate, but not spectatcular, while keeping a little left over for a rainy day. This is speculation of course. I am not for one minute suggesting anyone would do anything either illegal or unethical.

I guess the "under threat" mantra was a good tactic to keep pressure on costs while at the same time threatening the Government about what might happen if they allowed more competition.

OK, so assume the takeover is successful. APA has successfully recapitalised the company taking out at least 4.5 billion to repay itself the 11 billion it has borrowed - they've got about one third of their money back in cash.

Qantas now has a huge interest bill and massive borrowings. the downside of this is that if you don't make enough to cover your annual interest bill and capital repayments you are in very deep s*^t. The upside is that anything left over after costs and interest payments is profit, moolah, call it what you will, and it can be substantial.

So in effect, what APA is doing is converting a cash rich, conservative organisation that likes to own its assets, into a radical, cash lean operation that owns as little as possible, and even then has borrowed the money to buy what it has to. You know the drill - lease everything - only ferchrissake make the lease payments!

Now we know this is a risky strategy, but here is the twist, it's not a risky strategy at all!!! Why? Because no Commonwealth Government, Labor or Liberal, can afford the political fallout of seeing Qantas fail.

A curious twist happens when Governments make deals with businesses, about nine months after the deal is done and anything goes wrong, its always the Governments fault. Take the Lane Cove Tunnel or Citylink in Melbourne, is anyone blaming the businesses for being lying rotten greedy weasels???? Of course not!!!! The are blaming the Government for having signed a contract with a bunch of lying rotten weasels. The weasels can just keep making money while the Government cops the blame!

So can anyone guess who gets the blame if Qantas gets into trouble? Thats right - not APA - the Government for letting it proceed! Can you imagine the public outcry if Qantas announces its in financial trouble? How big do you think the demonstrations would be if Qantas announces that it is considering a takeover bid by Koreans or Chinese companies? "we tried our hardest" APA said "We thought we could succeed, and so did the Government" says APA. But guess who wears the stink? Thats right! The Government!


This is where the "legally enforceable undertaking" given by Qantas to the Government is actually in the company's favor NOT the Australian publics favor, let alone the Qantas workers. All the company has to say is "we complied with our undertakings balh blah, but the government is destroying our business by allowing Singapore airlines blah blah.." Thats how it will spin.

As a result, Qantas is going to be safe from increased competition for as long as APA owns it. You can also expect that the Government will stand 100% behind Qantas (Labor or Liberal) in any face off with its staff. If Qantas does get into trouble, the Government will have no choice but to modify the conditions of their legal agreement and perhaps make other conditions (like the 51% rule) or face Qantas going down the tubes and being sold to the highest bidder.

So there is really a lot of blue sky for APA, much more than the public or the market realises, because the share market has not factored in Qantas's close links with both political parties, its superb spin machine and its value as an iconinc Australian institution that must not be allowed to fail. Thats worth plenty more than the sharemarket thinks it's worth, but it appears that only APA can unlock this value, or the present Board is incapable doing the same thing, assuming the shareholders would want to.