Qantas: Will UBS Finally Succumb?

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It is difficult to take our attention away from the continuing story surrounding Qantas.  The old ‘will it or won’t it’ takeover battle by a private consortium.

Following a fall in the share price from near the takeover level to below AUD$5 a share last week, it has since added nearly 5% as speculation grows as to whether the Union Bank of Switzerland, most commonly know as UBS, will finally succumb now that they have picked up an additional shareholding for around AUD$5 per share.

It would be pretty tough to resist a quick 10% return on investment especially when the broader Australian stock market has had a flat return since the start of the year.

We reported the other day that Southern Cross Equities, based in Sydney, was of the opinion that the Airline Partners Australia bid for Qantas was a dead deal.  Based on reports, it would seem as though anything less than a 90% acceptance and a move to compulsory acquisition would have serious consequences for APA’s financing of the deal.

As Reuters reported, “The bid consortium has approached banks financing the deal to negotiate a new funding package if shareholder opposition forces it to complete a bid with less than 90 percent of acceptances, sources familiar with the situation said.”

The financing of the deal amounts to AUD$8.4 billion; not an insignificant amount.  Any increase in the risk premium demanded by lenders could potentially add millions of dollars to the interest payments and therefore jeopardise the whole deal. Especially as the consortium have made several undertakings that they would not make any material changes to the operations of the airline, including service and staffing levels.

Plus, once the airline effectively passes out of the hands of retail shareholders it can be almost guaranteed that Qantas’s favourable operating conditions will be challenged by international carriers, especially those from Asia.

There is also the suggestion that the consortium could just turn on its heels and walk away from the deal, perhaps to regroup before returning for a second bite of the cherry in a few months time.  However, that would most likely mean a bid at a price higher than the current AUD$5.45 they have currently on the table.

Considering the costs of putting this deal together, we find it improbable that the consortium will just walk away and put the whole project in mothballs, only to come back with a higher price.

It would seem much more likely that furious negotiations are going on behind the scenes now to see if the consortium can eke extra financing at not too high a cost in order to sweeten the offer. UBS, already sitting on the decent short-term return, probably won’t take too much convincing if APA returned with just another 10 cents on the table.  They could argue – in a way that only investment bankers can argue – that they have worked to maximise returns for their clients and that they didn’t think there would be much further growth in Qantas.

It doesn’t seem like much, but it would probably be enough to let everyone proceed with the transaction. UBS – and other shareholders – get a better deal, APA gets Qantas, and the financiers get to earn a bit more interest on their loan book. Everyone’s a winner.  Maybe.

Kris Sayce
The Daily Reckoning Australia

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
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