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Wirraway
2nd Oct 2002, 19:21
Thurs "Australian Financial Review" 3/10/02

Qantas ready to bid
Oct 3
Jane Boyle

Qantas Airways has defied the gloom in the global aviation industry and added $720 million to its war-chest to fund buying a potential stake in Air New Zealand and other investments.

But the airline's rights issue fell $80 million short of target because retail shareholders baulked at a $200million offer at $4.20 a share after a recent slide in the stock. Its shares tumbled a further 9 to $3.55 yesterday amid fears of a war against Iraq.

The share price fall is a blow to institutional investors who oversubscribed a $600 million issue, also at $4.20 apiece, six weeks ago. And because of the retail shortfall, institutions had to pick up $100 million of additional stock under standard sub-underwriting agreements.

Qantas could conclude a deal to buy up to 25 per cent of Air New Zealand by the end of this month, which analysts have estimated would be worth between 20 and 60 a share to Qantas.

However, any deal must be approved by the NZ Commerce Commission and the ACCC, and Air NZ's controlling shareholder, the NZ Government. The NZ Government's minority party, the United Future Party, yesterday urged it to explore all options before agreeing to a Qantas deal.

The airlines must also resolve issues arising from their membership of different multi-lateral alliances.

Air NZ is liable for a break fee of about $40 million if it leaves the Star Alliance to join Qantas's oneworld. Under Star rules it would also face restrictions on co-operation with other oneworld airlines.

While such hurdles are being taken into account in negotiations, there is no guarantee Air NZ will join oneworld, and some Star carriers have expressed interest in wooing Qantas to Star.



Safety in numbers

While fear of a war isn't good for airline share prices, it makes a Qantas-Air New Zealand deal more likely.

After all, there's safety in numbers in these bad times, particularly Salomon Smith Barney's numbers, which suggest the carriers can expect to split $NZ360 million ($314 million) in synergies by the third year of an alliance. SSB's Jason Smith is looking for a deal before the end of this month. Qantas should announce it will spend about $450 million to $520 million buying up to a 25 per cent of Air New Zealand.

Smith believes it's only the really fiddly bits of the transaction - perhaps the last 5 per cent - that Qantas's Geoff Dixon and Air New Zealand's Ralph Norris are thrashing out. After that, a formal proposal will go to the Air New Zealand board or to the carrier's owner, the New Zealand Government.

There are two key dates for a potential announcement; the Qantas annual meeting in Perth on October 17 and Air New Zealand's AGM on October 29. You'd have to suspect the possibility of a deal was at least one of the reasons Qantas decided to delay a decision on its New Zealand domestic expansion until next month.

SSB expects that in any alliance the carriers will have to surrender some bilateral slots, probably on the US and Hong Kong routes. As far as Air New Zealand is concerned, the pair will need to give commitments on branding, retaining a NZ head office, and maintaining a board with a majority of Kiwis.

The unfortunate thing for anyone looking to make money on an alliance is that much of the potential gain is already evident in the Air NZ share price. Perhaps paradoxically, given the airline's huge share price slump in the past year, SSB considers its shares among the most expensive airline shares in the world. SSB values Air New Zealand at NZ50c to NZ55c, before accounting for a tie-up with Qantas.