APA Qantas Bid Strategy
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APA Qantas Bid Strategy
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.
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.
Last edited by YesTAM; 13th Apr 2007 at 05:55.
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A Charlie Foxtrot in the making
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!
One hiccup = a Cluster F^&* of a magnitude that makes Ansett look like losing your wallet at the end of a big night out
Is Qantas an airline that employs accountants or a an accounting/banking firm with some stupid expensive aeronautical things getting in the way of doing business
J
Not happy Australian
The trend in the past 20 years by airline executives especially the LCC breed, has been to rubbish the way airlines traditionally did business. They come in spruking new lean and mean everything, telling everyone how they can reinvent the wheel blah blah, whilst in the same breath rubbishing legacy airlines. However these guys along with APA are forgetting that the airline business is a one of a kind industry. You go ultra lean and mean at your own peril. Airlines need to make hay while the sun shines and have something in reserve when times are tough. One more SARs, 9/11, Asian economic meltdown, WWIII and QF will be another Pan Am. Now given the position that they are in it at the moment it would be one of the greatest corporate stuff ups of all time!
As said above I cannot see how having an airline, which is effectively part of the national transport infrastructure (like it or not), going from being in a very financially strong position to being in debt to its eyeballs as being in Australia's national interest. Has the government considered the 70% scenario before it approved the the takeover?
As said above I cannot see how having an airline, which is effectively part of the national transport infrastructure (like it or not), going from being in a very financially strong position to being in debt to its eyeballs as being in Australia's national interest. Has the government considered the 70% scenario before it approved the the takeover?
Someone once commented;
“If a capitalist had been present at Kittyhawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.
You've got huge fixed costs, you've got strong labor unions and you've got commodity pricing. That is not a great recipe for success. I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: “My name is Warren and I'm an aeroholic.” And then they talk me down.”
You've got huge fixed costs, you've got strong labor unions and you've got commodity pricing. That is not a great recipe for success. I have an 800 (free call) number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: “My name is Warren and I'm an aeroholic.” And then they talk me down.”
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I hang my head in shame.
That we are powerless to stop this full on vanilla robbery in plain sight, it's not even tricked up, of the assets and goodwill of an airline that we paid for out of our taxes, and having watched the same stunts in the eighties called something different is just beyond me and an indictment of the dumbing down of the Australian electorate.
You can call it anything you like, but I call putting 5 odd billion down to buy something and taking circa 5 billion in cash back out and replacing everything else with debt and calling it financially more efficient to sell back top thje shareholders at some later point in time is an insult to our common sense. And that is not counting the gazillion dollars in fees that Macbank et al cop in fees. And somehow we are suipposed to be grateful.
Guess who is paying, and it is not them.
We have it seems learnt nothing.
That we are powerless to stop this full on vanilla robbery in plain sight, it's not even tricked up, of the assets and goodwill of an airline that we paid for out of our taxes, and having watched the same stunts in the eighties called something different is just beyond me and an indictment of the dumbing down of the Australian electorate.
You can call it anything you like, but I call putting 5 odd billion down to buy something and taking circa 5 billion in cash back out and replacing everything else with debt and calling it financially more efficient to sell back top thje shareholders at some later point in time is an insult to our common sense. And that is not counting the gazillion dollars in fees that Macbank et al cop in fees. And somehow we are suipposed to be grateful.
Guess who is paying, and it is not them.
We have it seems learnt nothing.
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However these guys along with APA are forgetting that the airline business is a one of a kind industry.
They are in the 'making money business'.
Let's get that straight.
Ah the joys of the 'free market economy' and a 'business friendly government'.
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You do not meet Cost of Capital
GD's favourite line to Pilots, Cabin Crew, Engineers, etc etc etc...
Quote:
However these guys along with APA are forgetting that the airline business is a one of a kind industry.
Yes and we will never meet Cost of Capital. GD has destroyed the loyal employee base Qantas had and decimated the future of aviation career paths for Australians. How will APA struggle with this concept ? The next few months will be very interesting.
Quote:
However these guys along with APA are forgetting that the airline business is a one of a kind industry.
Yes and we will never meet Cost of Capital. GD has destroyed the loyal employee base Qantas had and decimated the future of aviation career paths for Australians. How will APA struggle with this concept ? The next few months will be very interesting.
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IMHO...
Blame Little JH and his user-pays, neo-conservative mates and the financiers who now sit in the building which arose behind the old GPO facade.
Yes, companies exist to make money for their shareholders - so management has a duty to always be thinking about how they can control costs and maximise revenue - but that can be done on a short- or long-term horizon.
The former simply looks at what can we sell/cut and what can we charge; the latter looks at the bigger picture, ok we pay our people a bit more but they give such good service that we've got a loyal client-base which will stick by us in the lean times.
But will LJH get voted out? Not whilst Mr Reasonably-Well-Off from Castle Hill's wallet continues to fatten. And that is all that matters...
I guess one can't blame the bankers, they're in business to make money from assets and here they've spotted an asset from which they believe they can make money. The blame possibly lies with those who allowed the situation to develop, both politically and within the enterprise. Clearly, APA think they will be able to get above-average returns out of the business, over the medium- to long-term. One could be for asking why no-one (eg. regulators) has asked why incumbent management has not been able to extract the same value and, as a result, to what extent their duty to shareholders has possibly not been fulfilled.
Blame Little JH and his user-pays, neo-conservative mates and the financiers who now sit in the building which arose behind the old GPO facade.
Yes, companies exist to make money for their shareholders - so management has a duty to always be thinking about how they can control costs and maximise revenue - but that can be done on a short- or long-term horizon.
The former simply looks at what can we sell/cut and what can we charge; the latter looks at the bigger picture, ok we pay our people a bit more but they give such good service that we've got a loyal client-base which will stick by us in the lean times.
But will LJH get voted out? Not whilst Mr Reasonably-Well-Off from Castle Hill's wallet continues to fatten. And that is all that matters...
I guess one can't blame the bankers, they're in business to make money from assets and here they've spotted an asset from which they believe they can make money. The blame possibly lies with those who allowed the situation to develop, both politically and within the enterprise. Clearly, APA think they will be able to get above-average returns out of the business, over the medium- to long-term. One could be for asking why no-one (eg. regulators) has asked why incumbent management has not been able to extract the same value and, as a result, to what extent their duty to shareholders has possibly not been fulfilled.
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It seems to me that this whole affair might bear an eerie resemblance to the Merchant of Venice.
Who plays the role of Shylock?
Is it APA or Darth or maybe the banks underwriting the takeover bid?
I'm leaning towards Darth and APA is Bassanio who wants to borrow on QF's credit.
Is Antonio represented by the QF employees?
Who plays Portia and rescues Antonio?
Perhaps some future Federal Government that has to pick up the pieces that Johnny Howard is allowing to happen.When you think about the defence implications alone QF cannot be allowed to go the way that Ansett did.
Remember though 2 of the best quotes from the play and I find them uncannily relevant...
"The devil can cite Scripture for his purpose."
"All that glitters is not gold."
Who plays the role of Shylock?
Is it APA or Darth or maybe the banks underwriting the takeover bid?
I'm leaning towards Darth and APA is Bassanio who wants to borrow on QF's credit.
Is Antonio represented by the QF employees?
Who plays Portia and rescues Antonio?
Perhaps some future Federal Government that has to pick up the pieces that Johnny Howard is allowing to happen.When you think about the defence implications alone QF cannot be allowed to go the way that Ansett did.
Remember though 2 of the best quotes from the play and I find them uncannily relevant...
"The devil can cite Scripture for his purpose."
"All that glitters is not gold."
Last edited by lowerlobe; 13th Apr 2007 at 22:24. Reason: second thoughts
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......et tu Brute`
The stench from this whole sorry saga becomes more putrid day by day.
Now we hear that the APA "chain saw gang" are going to rip out $4billion in costs in the FIRST YEAR !!!
This is after a yearly assault from the Sustainable Futures onslaught for the last 5 years to reap a piddly $1b
I approached one of our "esteemed " Management team after a trip this week and asked him- his thoughts on this deal.???
Guess what.........he gave a "human" response!!! He said:
WE'RE STUFFED.
Now we hear that the APA "chain saw gang" are going to rip out $4billion in costs in the FIRST YEAR !!!
This is after a yearly assault from the Sustainable Futures onslaught for the last 5 years to reap a piddly $1b
I approached one of our "esteemed " Management team after a trip this week and asked him- his thoughts on this deal.???
Guess what.........he gave a "human" response!!! He said:
WE'RE STUFFED.
I just love how APA will charge QANTAS consultancy fees for their expertise while still publicly listed!
They had to disclose that 4 billion will be extracted after just one year (remember they put up 3.5 billion in the bid and the rest in debt). To add to this rape, the loans are even more restrictive so when disaster strikes (I hope I am wrong) the banks will come calling. Also while they own 70 % APA cannot get their hands on the 2 billion in cash.
Airlines...how to make a million?
Invest 10!
They had to disclose that 4 billion will be extracted after just one year (remember they put up 3.5 billion in the bid and the rest in debt). To add to this rape, the loans are even more restrictive so when disaster strikes (I hope I am wrong) the banks will come calling. Also while they own 70 % APA cannot get their hands on the 2 billion in cash.
Airlines...how to make a million?
Invest 10!
Breathtaking naivety
From what I can ascertain in this article
http://www.smh.com.au/news/business/...971360129.html
our politicians are
a) naive
b) indifferent
c) a & b
except Costello who is
What did they think the motive of the equity partners was????
and this is just priceless...
I guess everyone knew that before they mailed in their acceptances....
http://www.smh.com.au/news/business/...971360129.html
our politicians are
a) naive
b) indifferent
c) a & b
except Costello who is
not expected to change his position. When he approved the deal in March, the Treasurer said it was not his job to determine how much debt individual companies should carry on their books.
and this is just priceless...
There is also speculation that Qantas is about to issue its fourth profit upgrade since late last year, thanks to its best passenger loads in more than 10 years. The latest figures show the airline filled a record 86.6 per cent of its international seats in January.
Going by the sounds of things looks like we will see the demise of another national airline. I've read a few things about Ansett and this is sounding more and more like that every day.
5 years time and Virgin will be our national carrier and Tiger will replace Virgins position and Qantas will be a forgotten memory........
Hope not but its looking that way.
5 years time and Virgin will be our national carrier and Tiger will replace Virgins position and Qantas will be a forgotten memory........
Hope not but its looking that way.
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This whole deal is about GREED, CASH , POWER and CASH.
Private Equity consortiums through out the World could not give a rats rissole about the Host that they are about to gorge on.
Their exit strategy ( read : next host) is already mapped out in 3-5 years after they have finished their "gorging" on the Rat.
In ten years time, we'll all look back and ask one question when we're roaming around the Qantas museum in Longreach.
HOW THE HELL DID WE LET THEM GET AWAY WITH THIS....WAY BACK IN 2007??
Private Equity consortiums through out the World could not give a rats rissole about the Host that they are about to gorge on.
Their exit strategy ( read : next host) is already mapped out in 3-5 years after they have finished their "gorging" on the Rat.
In ten years time, we'll all look back and ask one question when we're roaming around the Qantas museum in Longreach.
HOW THE HELL DID WE LET THEM GET AWAY WITH THIS....WAY BACK IN 2007??
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YesTam
Sir,
Thankyou for a fine piece of perceptive journalism, I've not seen anything so well put as you did on this whole sorry mess! Well done!
It will be interesting to see as to how this all pans out, I for one wont be surprised as to how whatever government comes out of all this in the end, let alone the cretons instigating it all.
As an aside , it is very strange that we havent heard from the likes of Cute Borg, Munt or some others on this thread. Or are they part of the t*sser management?
JO.
Thankyou for a fine piece of perceptive journalism, I've not seen anything so well put as you did on this whole sorry mess! Well done!
It will be interesting to see as to how this all pans out, I for one wont be surprised as to how whatever government comes out of all this in the end, let alone the cretons instigating it all.
As an aside , it is very strange that we havent heard from the likes of Cute Borg, Munt or some others on this thread. Or are they part of the t*sser management?
JO.
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pilotdude09 - would have to agree with you.
Ansett was crippled by debt and the need to keep up the interest repayments.
Airlines are cyclical, the bad times will roll on, and the debt will cripple Qantas.
What makes this deal different?
Ansett was crippled by debt and the need to keep up the interest repayments.
Airlines are cyclical, the bad times will roll on, and the debt will cripple Qantas.
What makes this deal different?