The A$11 billion ($9 billion) private equity takeover bid of Qantas Airways is poised to succeed, but a late change in the offer also means the airline will take on further debt.

Airline Partners Australia, the private equity group bidding to acquire Qantas, was forced to return to its bankers after it became apparent that 90% of Qantas shareholders might not accept the offer. Under Australian law, if 90% accept then the remaining 10% must also sell. APA's original loan commitments required it to own all of Qantas.

Bankers broke an impasse in the takeover plan by agreeing in April to drop the acceptance level to 70%, which almost guarantees shareholder approval. Shareholders have until early May to accept this offer. If at least 70% do, APA will buy the shares of all those who accept, and Qantas will cease to be a publicly traded company, although it could still have minority shareholders.

© Qantas  

The deal to buy Qantas has been more complex than expected

This is not the result APA wanted, but it was the only way, without it offering more, to complete an acquisition that has proven more complex and contentious than expected. It appears to be the largest-ever private-equity takeover of an airline to date.

The lower shareholder acceptance level came at a price. APA is borrowing A$7.5 billion to pay for its acquisition. If it does not acquire all of Qantas, it cannot offer the airline's assets as security. APA's financing terms have not been disclosed, but the banks apparently insisted it repay more of its loan earlier. As a result APA plans initially to dip deeper into Qantas coffers. It warns the debt level will rise "significantly".

In the first year APA expects to reduce Qantas capital by A$2.5 billion and pay another A$1.5 billion in shareholder dividends. Both will apparently go to repayment of APA's loan. Another A$2 billion in capital returns is expected in later years. As a result, the airline's equity base will fall by A$4 billion and its debt-to-earnings ratio will triple.

Qantas was headed for turbulence before this added debt. Singapore-backed Tiger Airways plans to launch low-cost competition within Australia this year, putting pressure on revenues, but Qantas and low-cost subsidiary Jetstar are also boosting capacity.

Jetstar has ordered nine more Airbus A320s for domestic use and Qantas is shifting four Boeing 767s from overseas to domestic routes. With Virgin Blue adding capacity in Australia's busy Sydney-Melbourne-Brisbane triangle, it is clear the incumbents are aiming to send Tiger packing.

Qantas seems intent on defending its position. Chief financial officer Peter Gregg explains: "The basis of all of this is to protect our 65% market share."

A bloody fare war coupled with Virgin Blue's launch next February of Australia-US flights in a market that Qantas now dominates will hit revenues hard at a time when Qantas can ill afford it.

Source: Airline Business