Macquarie, Texas Pacific Bid for Australia's Qantas

Posted 22 November 2006 @ 07:19 am EET     Print     Reprint     E-Mail     Comments

MELBOURNE/SYDNEY (AP) - Investment bank Macquarie Bank and private equity firm Texas Pacific Group have proposed buying out Australian airline Qantas Airways in a deal that could be worth more than A$10 billion ($7.7 billion), pushing Qantas shares up as much as 21 percent.

"The approach is confidential and incomplete and is being investigated by Qantas," Qantas said in a statement, after a newspaper reported that a Macquarie-led buyout possibly worth A$10.3 billion was in the works.

A deal would mark a change in strategy by private equity groups, which had been hunting for cash-rich retail and media assets in Australia.

A Qantas spokesman could add nothing further to its statement and Macquarie declined to comment.
Qantas shares soared to a record high of A$5.25, and last traded up 15 percent at A$5.03, valuing the group at A$10 billion.

"This has come as a complete surprise as it is not the usual candidate for private equity," said James Holt, a portfolio manager with Zurich Financial Services, which holds about A$10 million worth of Qantas shares.

Holt said he would have sold Qantas if it had been trading at this price before but was now holding on. "Given that it is in play now, you will have to keep your options open."

Two analysts said the market was speculating on a bid at A$5.50 a share, which would value Qantas at A$10.9 billion. That would equate to 18.5 times forecast earnings for 2007, ahead of its two bigger Asian rivals by market value, Singapore Airlines at 12.4, and Cathay Pacific Airways (0293.HK) at 17.5.

J.P. Morgan analyst Matt Crowe said Qantas directors would probably want more than A$5.50 a share.

"It's going to be very difficult to get over the line," he said.

Ratings agency Standard & Poor's placed Qantas' BBB+ credit rating negative creditwatch on expectations any buyout could be heavily debt financed, weakening its credit quality.

TRICKY DEAL

The deal would involve Macquarie and associates taking a 25 percent stake in Qantas, other Australian investors taking 25 percent, Qantas senior management 1 percent and international players led by Texas Pacific (TPG.UL), taking the rest, the Australian Financial Review newspaper said.

That mix would allow the consortium to get around ownership restrictions that limit one individual entity to no more than 25 percent of the airline, and international interests collectively owning no more that 49 percent.

"There is no view to changing any of those caps," Australian Deputy Prime Minister Mark Vaile told reporters.

To protect landing rights at airports around the world, Qantas must remain majority-owned by Australians, as take-off and landing rights are negotiated between countries.

Assuming a transaction does not breach the Qantas ownership restrictions, final approval of any foreign investment in Australian assets would rest with Australia's Treasurer, Peter Costello, based on national interests.

"On the commercial side, it is for the board of Qantas and the shareholders of Qantas as to what they do," Vaile said.

Buying an airline would be unusual, even for cashed-up private equity groups and Macquarie, which has chased everything from top Australian ports group Patrick to the London Stock Exchange (LSE.L) over the past year.

Macquarie, which recently led a $9 billion purchase of UK utility Thames Water and made a $1.4 billion bid for a German water metering firm, typically looks for assets that generate steady earnings.

NEW FOCUS

International airline earnings are more volatile than the businesses Macquarie and private equity groups normally chase. However a founder of Texas Pacific, David Bonderman, said in June his group might be interested in a stake in Italy's Alitalia (AZPIa.MI).

"Being a cyclical business, the multiples won't be high as they are prepared for pay for supermarkets and things like that," said Zurich's Holt.

Texas Pacific and its affiliate Newbridge Capital bought department store chain Myer for A$1.4 billion in March, while Kohlberg Kravis Roberts (KKR.UL) led a failed A$18.2 billion attempt to buy retailer Coles Myer Ltd.

J.P. Morgan's Crowe said Qantas might make a good candidate for private equity as it has a stable domestic business fuelling half its earnings, with only one rival, Virgin Blue Holdings Ltd.

Based on what the newspaper reported, analysts said Macquarie might sell Qantas planes into Macquarie's aircraft leasing business and put Qantas's terminal assets into Macquarie Airports (MAP.AX).