B A Lert
2nd May 2007, 00:50
From today's "The Australian".
Fear of a hard landing
* If the private consortium bid for Qantas unravels this Friday, some difficult questions will be asked of the airline's board of directors, writes Glenda Korporaal
* May 02, 2007
THE Qantas board has traditionally been one of the plum jobs for Australian corporate directors. In a few days the reputations of some of Australia's top board members - including Qantas chairwoman Margaret Jackson, former Qantas chief James Strong, Publishing and Broadcasting Limited executive chairman James Packer, former defence chief Peter Cosgrove and Commonwealth Bank chairman John Schubert - will be judged by the harsh light of the market.
If the $11 billion bid launched last December by Airline Partners Australia goes ahead and Qantas goes on to become a bigger, better airline under the management of the Macquarie Bank-led private equity consortium, they will be seen to have done the right thing.
If the bid fails, the directors, particularly Jackson, face a difficult time and some tough questioning of their handling of the deal.
There will be a market perception that shareholders have rejected their advice and may have even lost confidence in them, leaving a top management team unsettled by the loss of substantial financial incentives it would have received under APA management and a staff unsure of their own future.
That Jackson's warnings that Qantas shares will plummet if the bid of $5.45 a share fails may well come true will be cold comfort for her if the market perceives she has not handled the process well.
This Friday night is crunch time for the bid. If APA receives 50 per cent of the shares by 7pm, it is on the way towards gaining control of Qantas. The deadline for acceptances will be extended by another two weeks, by which time it hopes to pick up 70 per cent of the shares. But even if APA doesn't quite get there, it can still declare the bid unconditional and use its market power to put its own appointees on the Qantas board.
The goal is then to slug it out until finally getting to 90 per cent acceptances, when it can de-list the company from the stock exchange and take full control.
If the consortium doesn't get to 50 per cent this Friday, the bid has to lapse and Qantas goes back to normal, or as much as that is possible given the events of the past few months. So far just under 26 per cent of shareholders have accepted the bid, a number that has been easing back in recent days.
The bid supporters argue that acceptances will flood in at the last minute on Friday but concede that the initial public momentum for the bid appears to have stalled.
If it fails, Jackson and her board will have their work cut out for them in stabilising the situation at Qantas and getting everyone to focus on life as it was before the bid.
"How it plays out will mean that Jackson is either described as a hero or a villain," Australian Shareholders Association chief executive Stuart Wilson says. The Australian Institute of Company Directors refused to comment on the situation.
Qantas directors have avoided the spotlight during the bid, leaving Jackson to make all the public running.
There have been reports that some high-profile directors have been uncomfortable with some aspects of Jackson's handling of the situation, particularly her public comments four weeks ago urging shareholders to accept the bid and warning prices would fall if the bid failed.
Even now, few serious analysts question the wisdom of the Qantas board in recommending the APA bid back in December, given that the offer price was well above the market price of the shares.
If it believes a bid is a good deal for shareholders, a board is duty-bound to say so and give their shareholders a chance to make their own decision.
Months later, despite a rise of almost 20per cent in the sharemarket, the price of Qantas shares, which closed yesterday at $5.30, has never topped the bid price.
No other bidder has emerged on the horizon - unlike the situation with Coles - nor is any expected.
The criticism of the Qantas board begins with the appearance of not only recommending the bid but actively embracing the idea of the takeover with considerable enthusiasm.
At Coles, chairman Rick Allert has kept potential bidders at arm's length while he negotiates the terms of engagement. But, in December, Jackson was photographed embracing Qantas chief executive Geoff Dixon, who will remain chief executive either way, and APA spokesman Bob Mansfield.
In subsequent media interviews she has talked of the benefits of Qantas operating under private equity management and warned that Qantas shares will plunge if shareholders reject the bid.
In an interview with The Australian she said she would be devastated if the bid did not go ahead. Jackson, who received some criticism for her comments at the time, has subsequently kept her head down, refusing requests for public comments.
Traditionally, the aviation business is volatile, with airline stocks vulnerable to shocks about high oil prices, international terrorism, health crises such as severe acute respiratory syndrome, changes in government regulation and market competition. But in the months since the board recommended the bid, it seems that everything has gone upward for Qantas and world aviation stocks.
Some have criticised the Qantas board for not further upgrading its profit outlook for the company to reflect its improved earnings outlook, despite two upgrades during the course of the bid.
Some have suggested the board should have withdrawn its initial support for the bid once the sharemarket rose and the outlook for Qantas shares improved.
Another crunch point could have been several weeks ago, when the APA consortium dropped its minimum acceptance condition from 90 per cent to 70 per cent.
"What the board did initially was understandable," says Andrew Sisson, head of fund management company Balanced Equity. Sisson, whose fund owns 4 per cent of Qantas, has publicly rejected the $5.45 a share offer as being too low and has been the fly in the ointment for the Qantas bidders, helping to block their initial aim of 90 per cent shareholder support.
"The consortium came up with a price they felt was OK and put it out to shareholders," he says. "It was probably reasonable and certainly was defensible. You can't criticise them for that. The problem has been that ever since it recommended the bid things have changed. Qantas's earnings outlook has gone up 36 per cent and the market has gone up by almost 20 per cent."
Sisson admits that the past few months have not been easy for the Qantas board. But he believes that it could easily have dropped its support for the bid in the light of the improved market outlook.
"They could have withdrawn their recommendation and said it was right at the time but it is not appropriate any more," he says.
Sisson is particularly critical of Jackson's comments. "The board can say it has got a good deal and put it to shareholders," he says. "But the chairman is not meant to turn around and be devastated if shareholders decide to hold on to their shares and decide that it is totally inappropriate. The chairman stepped beyond the normal bounds by expressing her frustration that shareholders were not accepting."
Sources close to Jackson say that she still believes that Qantas shares will fall if the bid fails and she felt duty-bound to point this out to shareholders. She believes the market needed to be informed that more than 40 per cent of Qantas stock was in the hands of hedge funds that would not be long-term holders of the stock.
Jackson and the board also believe that the market has not recognised the true potential impact on Qantas of future competitors coming on to its routes, such as Virgin Blue's plans to fly across the Pacific and the Singapore government-backed Tiger Airways' plans to fly into Australia. These will all have adversely affect the outlook and the share price.
Sandy Easterbrook, of corporate governance advisory firm CGI Glass Lewis, points out that there have been several cases this year where institutional shareholders have not accepted recommendations by boards of takeover offers, arguing that the shares were worth more than the bid price.
This has been the case with Australian Provincial Newspapers, which has been the subject of several private equity approaches.
"What is quite interesting is the fact that some fund managers are prepared to back their own judgment on the long-term value of the stock which is quite interesting," Easterbrook says. "Sometimes we feel that our institutional clients know more about the company than some directors. They study not just the company but the industry and the international situation. They often know the particular industry very well globally. It's not just Qantas."
One issue that has emerged in the months since December is the problem of fund managers and shareholders finding a good alternative investment for the money they will receive from the profit on their Qantas stock when most other blue chips are seen as fully priced.
Some have taken the view that they are prepared to pass up the offer of a short-term gain of a higher bid to remain a long-term holder of Qantas stock, which also offers a healthy stream of franked dividends.
Less well known is the private deadline that Qantas has put on the consortium.
With the bid dragging on much longer than expected - the initial hopes were for the deal to be wrapped up in March - the Qantas board decided that enough was enough. Had the APA consortium not agreed to put a deadline of this Friday on its offer, the board warned the consortium it could drop its recommendation of the bid.
The machinations of the Qantas board - most of the recent contacts were undertaken by phone hook-ups - are unlikely to become public. On the face of it, the whole process is a legitimate one, allowing Qantas shareholders themselves to make up their own minds on what they should do.
The board can only make a recommendation on what it thinks is best and leave it to the market. But if the bid unravels or Qantas faces more months of uncertainty, Jackson and her board will be in the firing line as the blame begins to fly.
Fear of a hard landing
* If the private consortium bid for Qantas unravels this Friday, some difficult questions will be asked of the airline's board of directors, writes Glenda Korporaal
* May 02, 2007
THE Qantas board has traditionally been one of the plum jobs for Australian corporate directors. In a few days the reputations of some of Australia's top board members - including Qantas chairwoman Margaret Jackson, former Qantas chief James Strong, Publishing and Broadcasting Limited executive chairman James Packer, former defence chief Peter Cosgrove and Commonwealth Bank chairman John Schubert - will be judged by the harsh light of the market.
If the $11 billion bid launched last December by Airline Partners Australia goes ahead and Qantas goes on to become a bigger, better airline under the management of the Macquarie Bank-led private equity consortium, they will be seen to have done the right thing.
If the bid fails, the directors, particularly Jackson, face a difficult time and some tough questioning of their handling of the deal.
There will be a market perception that shareholders have rejected their advice and may have even lost confidence in them, leaving a top management team unsettled by the loss of substantial financial incentives it would have received under APA management and a staff unsure of their own future.
That Jackson's warnings that Qantas shares will plummet if the bid of $5.45 a share fails may well come true will be cold comfort for her if the market perceives she has not handled the process well.
This Friday night is crunch time for the bid. If APA receives 50 per cent of the shares by 7pm, it is on the way towards gaining control of Qantas. The deadline for acceptances will be extended by another two weeks, by which time it hopes to pick up 70 per cent of the shares. But even if APA doesn't quite get there, it can still declare the bid unconditional and use its market power to put its own appointees on the Qantas board.
The goal is then to slug it out until finally getting to 90 per cent acceptances, when it can de-list the company from the stock exchange and take full control.
If the consortium doesn't get to 50 per cent this Friday, the bid has to lapse and Qantas goes back to normal, or as much as that is possible given the events of the past few months. So far just under 26 per cent of shareholders have accepted the bid, a number that has been easing back in recent days.
The bid supporters argue that acceptances will flood in at the last minute on Friday but concede that the initial public momentum for the bid appears to have stalled.
If it fails, Jackson and her board will have their work cut out for them in stabilising the situation at Qantas and getting everyone to focus on life as it was before the bid.
"How it plays out will mean that Jackson is either described as a hero or a villain," Australian Shareholders Association chief executive Stuart Wilson says. The Australian Institute of Company Directors refused to comment on the situation.
Qantas directors have avoided the spotlight during the bid, leaving Jackson to make all the public running.
There have been reports that some high-profile directors have been uncomfortable with some aspects of Jackson's handling of the situation, particularly her public comments four weeks ago urging shareholders to accept the bid and warning prices would fall if the bid failed.
Even now, few serious analysts question the wisdom of the Qantas board in recommending the APA bid back in December, given that the offer price was well above the market price of the shares.
If it believes a bid is a good deal for shareholders, a board is duty-bound to say so and give their shareholders a chance to make their own decision.
Months later, despite a rise of almost 20per cent in the sharemarket, the price of Qantas shares, which closed yesterday at $5.30, has never topped the bid price.
No other bidder has emerged on the horizon - unlike the situation with Coles - nor is any expected.
The criticism of the Qantas board begins with the appearance of not only recommending the bid but actively embracing the idea of the takeover with considerable enthusiasm.
At Coles, chairman Rick Allert has kept potential bidders at arm's length while he negotiates the terms of engagement. But, in December, Jackson was photographed embracing Qantas chief executive Geoff Dixon, who will remain chief executive either way, and APA spokesman Bob Mansfield.
In subsequent media interviews she has talked of the benefits of Qantas operating under private equity management and warned that Qantas shares will plunge if shareholders reject the bid.
In an interview with The Australian she said she would be devastated if the bid did not go ahead. Jackson, who received some criticism for her comments at the time, has subsequently kept her head down, refusing requests for public comments.
Traditionally, the aviation business is volatile, with airline stocks vulnerable to shocks about high oil prices, international terrorism, health crises such as severe acute respiratory syndrome, changes in government regulation and market competition. But in the months since the board recommended the bid, it seems that everything has gone upward for Qantas and world aviation stocks.
Some have criticised the Qantas board for not further upgrading its profit outlook for the company to reflect its improved earnings outlook, despite two upgrades during the course of the bid.
Some have suggested the board should have withdrawn its initial support for the bid once the sharemarket rose and the outlook for Qantas shares improved.
Another crunch point could have been several weeks ago, when the APA consortium dropped its minimum acceptance condition from 90 per cent to 70 per cent.
"What the board did initially was understandable," says Andrew Sisson, head of fund management company Balanced Equity. Sisson, whose fund owns 4 per cent of Qantas, has publicly rejected the $5.45 a share offer as being too low and has been the fly in the ointment for the Qantas bidders, helping to block their initial aim of 90 per cent shareholder support.
"The consortium came up with a price they felt was OK and put it out to shareholders," he says. "It was probably reasonable and certainly was defensible. You can't criticise them for that. The problem has been that ever since it recommended the bid things have changed. Qantas's earnings outlook has gone up 36 per cent and the market has gone up by almost 20 per cent."
Sisson admits that the past few months have not been easy for the Qantas board. But he believes that it could easily have dropped its support for the bid in the light of the improved market outlook.
"They could have withdrawn their recommendation and said it was right at the time but it is not appropriate any more," he says.
Sisson is particularly critical of Jackson's comments. "The board can say it has got a good deal and put it to shareholders," he says. "But the chairman is not meant to turn around and be devastated if shareholders decide to hold on to their shares and decide that it is totally inappropriate. The chairman stepped beyond the normal bounds by expressing her frustration that shareholders were not accepting."
Sources close to Jackson say that she still believes that Qantas shares will fall if the bid fails and she felt duty-bound to point this out to shareholders. She believes the market needed to be informed that more than 40 per cent of Qantas stock was in the hands of hedge funds that would not be long-term holders of the stock.
Jackson and the board also believe that the market has not recognised the true potential impact on Qantas of future competitors coming on to its routes, such as Virgin Blue's plans to fly across the Pacific and the Singapore government-backed Tiger Airways' plans to fly into Australia. These will all have adversely affect the outlook and the share price.
Sandy Easterbrook, of corporate governance advisory firm CGI Glass Lewis, points out that there have been several cases this year where institutional shareholders have not accepted recommendations by boards of takeover offers, arguing that the shares were worth more than the bid price.
This has been the case with Australian Provincial Newspapers, which has been the subject of several private equity approaches.
"What is quite interesting is the fact that some fund managers are prepared to back their own judgment on the long-term value of the stock which is quite interesting," Easterbrook says. "Sometimes we feel that our institutional clients know more about the company than some directors. They study not just the company but the industry and the international situation. They often know the particular industry very well globally. It's not just Qantas."
One issue that has emerged in the months since December is the problem of fund managers and shareholders finding a good alternative investment for the money they will receive from the profit on their Qantas stock when most other blue chips are seen as fully priced.
Some have taken the view that they are prepared to pass up the offer of a short-term gain of a higher bid to remain a long-term holder of Qantas stock, which also offers a healthy stream of franked dividends.
Less well known is the private deadline that Qantas has put on the consortium.
With the bid dragging on much longer than expected - the initial hopes were for the deal to be wrapped up in March - the Qantas board decided that enough was enough. Had the APA consortium not agreed to put a deadline of this Friday on its offer, the board warned the consortium it could drop its recommendation of the bid.
The machinations of the Qantas board - most of the recent contacts were undertaken by phone hook-ups - are unlikely to become public. On the face of it, the whole process is a legitimate one, allowing Qantas shareholders themselves to make up their own minds on what they should do.
The board can only make a recommendation on what it thinks is best and leave it to the market. But if the bid unravels or Qantas faces more months of uncertainty, Jackson and her board will be in the firing line as the blame begins to fly.