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Qantas domestic - mopping up the blood

By Jonathan J. Ariel - posted Thursday, 24 May 2007

What a difference a resignation makes.

Last week Qantas Chairman Margaret Jackson promised to disembark at the next AGM. But guess what? Her promise barely registered with shareholders. The share price moved just one cent on the back of her announcement. Her fan club would no doubt have hoped for the share price to fall out of bed, showing how indispensable she is to the airline. Sadly for them, no such luck.

Let's be clear. No seismic shift in the behaviour of the board took place at the meeting of May 17. Stockholders who legitimately seek some sort of contrition from the board for its obscene fawning over the cashed up ATM (Allco, TPG and Macquarie) consortium’s share offer have little to celebrate. Ms Jackson has glued herself to the chairman’s seat for six more months and those board members who decked the corridors of head office in Coward Street, Mascot with boughs of holly (thinking Christmas has come early) are still on the board.


The board’s loving (and one-eyed) embrace of the ATM offer seemed to personify special-interest politics, and the stench of aviation fuel from the runways at Sydney’s MacAirport dripped from every word the chairman voiced in amorous support of the bid.

A pilot’s licence is not required to solve what went wrong. Most in the press corps were right to question the chairman’s vociferous support for the offer. The chairman, you recall, advised shareholders that if they didn’t think the stock price would tank following a rejection of the bid, then they are “mental”. But these journalists missed the bigger picture, something I mentioned here on March 22. Something that Balance Equity Management’s Mr Andrew Sisson and UBS Global Asset Management’s Mr Paul Fiani clearly didn’t miss. That is, that the real value of Qantas is closer to what a mega-carrier such as a merged United Airlines-Continental would be prepared to pay and not what the private equity piranhas were offering.

The sins of the board can be explained as follows. Imagine your parents pass way, and bequeath to you and your brother (your only sibling), real estate valued at $1 million. How do you know it’s worth $1 million? Well, your brother tells you that a neighbouring property with identical dimensions sold for $1 million only days ago.

Now assume your brother, advises that he has an offer of $1.3 million for the property and urges you to agree with him to sell it, saying that there is no higher offer, and that the price of $1.3 million is unheard of. While these two points are true - there is no higher offer on the table and the $1.3 million is admittedly an unheard of price - his undignified haste in insisting on your signature on the contract for sale, is truly obscene.

He is clearly (1) oblivious to the fact that if another party is offering $1.3 million then surely the property is worth more than $1.3 million, and (2) the true value of a property should be gauged after it is put on the market and every likely buyer is informed of its availability. And that every likely buyer is given time to raise the finance to make a genuine bid. Who knows what the property is worth, if the market is not comprehensively tested?

What the board should have done is state the bleeding obvious: that the $5.45 offer represented a 30 per cent premium to the share price of $4.20 (of November 6) the day before rumours of the offer first circulated, and that the “independent” Grant Samuel report, while useful, should not be the final arbiter of a fair share price. During the period in which Grant Samuel (the investment bank) prepared the “fairness opinion”, the board, to remain independent, could have marshalled its takeover defences; scouted for other bidders; adopted a poison pill; bought or sold off assets; leveraged up its capital structure; or adopted whatever other defensive measure may be effective under the circumstances. That way, even if the board was enamoured of the ATM bid, it could signal that the bid is too low, and that a higher bid would be entertained (favourably) by the board. This would be just the right thing to do, from a shareholders’ perspective.


Judging from media reports, the board did none of those things. Not one. On the contrary, it rolled over and asked the consortium to tickle its pouch.

The board’s cheering on of the $5.45 offer per share is perplexing to say the least given it is Qantas management and board who claimed over the years that the market had consistently undervalued the worth of the airline. So how can it now say that one bidder out of the blue has got the price right?

The very day Ms Jackson flagged her intention to resign at the next AGM, the ATM consortium advised that they have no further interest in a buy out of the airline. Coincidental? You be the judge.

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About the Author

Jonathan J. Ariel is an economist and financial analyst. He holds a MBA from the Australian Graduate School of Management. He can be contacted at

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