done and dusted
Raider destroys Qantas bid
* Jennifer Hewett, Steve Creedy, Glenda Korporaal
* May 05, 2007
AIRLINES Partners Australia's audacious $11 billion bid for Qantas collapsed last night when a US corporate raider, Samuel Heyman, failed to accept the offer.
The bidders were reeling last night with the news that the raider, which held $1 billion of Qantas stock - nearly 10 per cent - had not delivered his stock to the consortium.
APA had expected it to accept the bid of $5.45 a share, giving it the 50 per cent it needed by the 7pm deadline last night.
But Airline Partners announced at 8.30pm last night that it appeared that acceptances had not reached the 50 per cent level needed for the bid to go ahead.
According to sources, the bidders received acceptances for just 46 per cent of Qantas stock.
"If this is confirmed, APA's offer for Qantas Airways will not proceed," APA said in a statement.
The consortium said it remained of the view that its ownership plans for Qantas would have "significantly enhanced the airline, guaranteed strong growth and been beneficial for employees and customers".
Macquarie Bank executives in Sydney were aghast last night when the US raider, whom they had expected to accept the bid, made no response. Macquarie executives who were handling the bid had been talking to Mr Heyman's representatives during the day.
The collapse of the deal will lead to widespread recriminations.
The fact that the offer came down to the wire showed the coolness of the market to the bid, which was originally pitched well above the share price.
The Australian share market is up by 15 per cent since the offer was launched, and Qantas directors were forced to issue at least two profit upgrades.
The rejection appears to kill the bid, which was accepted by Qantas directors last December, and ensure that the Australian icon remains in public hands.
The bidders had been hoping that they would get over the line with a last-minute rush of acceptances from hedge funds, which had bought heavily into the Qantas deal. The fact that one US raider could seal the fate of the bid showed how close the deal was.
Yesterday morning the bidders announced that just under 35 per cent of investors had accepted.
Analysts had been expecting acceptances to pass the crucial 50 per cent of voting stock needed to keep the bid alive, but not the 70 per cent required to take it unconditional.
Fifty per cent would have given APA an automatic two-week extension in which to reach 70 per cent.
Figures released yesterday showed that by Thursday night, hard acceptances had jumped from 27.78 per cent to 34.59 per cent. A further 1.44 per cent was still in the institutional acceptance facility.
At least one institution, Credit Suisse, was rumoured to be selling after building up its stake on behalf of clients to 11.73 per cent earlier in the week.
APA made an impassioned plea to hedge funds holding an estimated 45 per cent of the airline's stock to help get the bid over the line and ran an extensive campaign in the lead-up to the deadline, warning shareholders that the value of their investment would plummet if the bid failed.
The bidders had expected that the hedge funds would be keeping the bid open as long as possible so they could continue to maximise profits by trading off the difference between airline's share price, which closed last night at $5.38, and the $5.45 bid price.
The manager of the only fund manager to publicly reject the bid, Balanced Equity's Andrew Sisson, said many of the hedge funds were still "sitting in the wings" yesterday, but he expected that they would have accepted the bid by last night.
BBY analyst Fabian Babich said hedge funds would have attempted to structure their acceptances to get the APA deal over the line but stop it from reaching 70 per cent.
He said the question was whether individual decision-making had achieved the right result.
"The hedge funds' incentive is to deliver a result that is above 50 per cent but as far away from 70 per cent as possible," he said.
"The reason for that is the closer you take APA to 70 per cent the less and less uncertainty there is about a deal being concluded and therefore the less incentive there is for anybody to be selling on-market."
MM&E capital co-founder Tom Elliott said many of the funds were expected to accept, but some were worried about the deal.
He said most hedge fund custodians tended to package-up acceptances and do one big acceptance on the last day, rather than a series of smaller ones.
Some could commit only a portion of their shares.
Mr Elliott said APA would have been on "very thin ice" if the bid were between 50 and 70 per cent.
He said the consortium could decide next week to take the minimum acceptance level below 70 per cent, but it was unclear whether the banks funding the bid would let them do that.
"As it is, I'm amazed that they were able to drop the condition to 70 per cent because all it is is a giant margin loan," he said. "It's only secured by the shares."
Consortium partner David Coe said on Thursday APA had not been involved in any negotiations with its banks about dropping the minimum acceptance level.
Mr Coe said the consortium members would reassess the situation over the weekend.
But sources close to the deal said yesterday that the economics of the bid might not stack up for APA if it had to go back to the well for a new financing deal at a lower level of acceptances.
They warned it could walk away if acceptances were down towards the 50 per cent level.
Private equity deals are based on the bidders gaining full control of the target and being able to borrow against the target company's assets to repay their banks.
The current financing package for 70 per cent ownership is effectively a bridging finance arrangement which involves higher interest rates, more fees to the bankers and stricter conditions than the deal negotiated when APA was expecting to get full control of Qantas.