The directors of Qantas Airways are recommending shareholders accept an A$11 billion ($8.6 billion) private equity offer for the airline.

US-based Texas Pacific Group, headed by David Bonderman, is one of the bidders, along with Australia's Macquarie Bank, two Australian firms in the Allco financial group, and Canada's Onex Corporation. The bidders term themselves Airline Partners Australia. The Qantas board rejected the group's first offer, but in mid-December accepted a second offer that was slightly higher and dropped several objections.

Because Qantas is seen as an Australian icon, the bid has sparked local outcries of nationalism. This prompted assurances from Australia's prime minister, deputy prime minister and treasurer that they would not relax foreign ownership caps to accommodate the offer. But the bidders have been careful to structure their offer to ensure that it does not trigger a need for review or approval under any foreign ownership, conflict of interest, or competition law.

If the deal is approved by shareholders, the Sydney-based Allco companies would own 43% and Australia's Macquarie Bank just under 15%. Qantas senior management intend to stay on and own 1%, bringing total Australian ownership to almost 60%.

Overseas investors, including Texas Pacific Group and Onex, would own the remaining 40%, but no single foreign investor would hold more than 15%. The government could still reject the bid on "national interest" grounds, but no one is predicting it will.

Industry observers are uncertain why private equity investors are interested in publicly-traded Qantas. Bonderman warned earlier in 2006 that airlines were already at the top of their cycle and would be heading down, so this was not the right time to acquire an airline. Typically, such investors buy distressed airlines at bargain rates, sell off assets, and then resell the core airline at a profit after it starts to make a comeback. Texas Pacific has enjoyed a string of such successes with Continental Airlines, America West and US Airways.

Qantas does not fit this pattern. It recently increased its profit forecast. Analysts see limited opportunity to cut more costs because Qantas is already well into a rigorous campaign that has already slashed A$2 billion in costs and its highly unionised workforce will continue to be a major obstacle to such moves as outsourcing maintenance. The new owners have already promised to keep maintenance operations in Australia or break up the airline.

Analysts predict a takeover will add about A$8 billion debt to existing borrowing by Qantas. Because of aircraft orders, the airline now has A$5.3 billion in balance sheet debt and about another A$6 billion in aircraft lease commitments. Australia's generous tax rules make Qantas somewhat attractive because highly leveraged Australian companies pay little tax.

Analysts estimate the new owners could reap A$1 billion to A$3 billion by spinning off Qantas assets: its catering and holiday divisions, frequent flyer plan, its freight unit and long-term airport terminal leases. The bidders have not indicated whether they would spin off Jetstar and QantasLink but say they will continue to focus expansion on Jetstar's new international operation.

Bonderman through his US investment firm Indigo Partners already owns a 24% stake in low-cost carrier Tiger Airways, a rival of Singapore-based Jetstar Asia, which is about 45% owned by Qantas. Onex is best known for a failed 1999 attempt to merge Air Canada and Canadian Airlines.

The new owners promise to invest more than A$10 billion in upgrading the Qantas fleet and premium class products

Source: Airline Business