Qantas Rejects $8.6 Billion Takeover Bid

Posted 13 December 2006 @ 08:03 am EET     Print     Reprint     E-Mail     Comments

MELBOURNE (Reuters) - Australia's Qantas Airways Ltd. rejected on Wednesday a A$10.9 billion ($8.6 billion) buyout offer from a group led by Macquarie Bank Ltd. and private equity firm Texas Pacific Group.

Qantas shares slumped to as low as A$4.93 after the offer was rebuffed and closed down 2.7 percent at A$5.09, compared with the conditional offer of A$5.50 a share.

"That is a fairly full price. In the ordinary course of investment cycle people would be reasonably pleased with that," said Guy Hutchings, chief investment officer with MFS Investment Managers.

"But the euphoria of private-equity financed takeovers at the moment and the liquidity that is driving these transactions, indicates that people would be on the back foot waiting for something higher."

A possible sale of Qantas, a national icon dubbed the flying kangaroo, has stirred nationalistic sentiment and reached the top levels of Australian politics, prompting the bidding group to stress that the airline would remain majority Australian owned.

Qantas has been interested in talking as it saw itself constrained by a share market that has not recognized the group's value and limits its ability to raise the capital it needs to fund its fleet and growth plans.

"The proposed offer price is A$5.50 per share and incorporates a number of complex conditions, the requirement for unanimous support by Qantas directors and a break fee," Qantas said in a statement. "The non-executive directors consider that the terms of the proposal are not acceptable," it said.

Qantas Chief Executive Geoff Dixon told the airline's staff that he, the board's other executive director, Chief Financial Officer Peter Gregg, and senior management backed the rejection.

The nine non-executive directors that need to be satisfied include Publishing & Broadcasting Ltd. executive chairman James Packer, former Qantas chief James Strong, chairman of Duke Energy Corp. and former BHP Billiton Ltd. chief Paul Anderson and Commonwealth Bank of Australia Ltd. chairman John Schubert. The bidders and Qantas said they would keep the market informed of any further developments.

"The board has admitted it's happy to do a deal. They're not saying the offer's over. They're just saying it's not quite enough for getting full control," said Tom Elliott, managing director of hedge fund MM&E Capital.

Ratings agency Moody's Investors Service said it might downgrade Qantas's credit ratings by more than one notch if the buyout went ahead as a successful bid would result in a big increase in Qantas's debt.

CONSIDERING RESPONSE

The bidding team, Airline Partners Australia, includes Australia's Allco Equity Partners with a 34 percent stake, Allco Finance Group with 11 percent, Macquarie with less than 15 percent and Canadian investment firm Onex Corp. and Texas Pacific with in total less than 40 percent. The group said in a statement it was considering its response to Qantas' rejection.

Allco Equity Partners said if the bid went ahead, it would seek to raise between A$600 million and A$700 million mainly from existing shareholders. Pacific Equity Partners had been involved in the talks but dropped out, a source close to the private equity firm said.

The offer price was 26 percent higher than Qantas's share price before the airline said on November 22 that it had been approached with a buyout offer. It values Qantas at 15.6 times forecast earnings for 2007, compared with regional rivals Singapore Airlines Ltd. at 12.6 and Cathay Pacific Airways at 17.8, according to Reuters data.

The Qantas offer coincides with a flurry of takeover activity in the U.S. airline industry. US Airways Group made a $8.6 billion offer for bankrupt rival Delta Air Lines last month.

U.S. media reports on Tuesday said UAL Corp.'s United Airlines is in preliminary talks to merge with Continental Airlines, while AirTran Holdings Inc. was preparing to make an offer for Midwest Air Group Inc.