13 May 2007

Great debacles of our time: The failed Qantas takeover

This one was always one that had our full attention from day one. And it stands as an example of a pretty good lesson in how not to do a private equity deal.

The story goes like this - a company that is roundly considered an all-Australian icon, Qantas, is subject to a takeover, where the guys taking the company over is a small cabal of management in league with Macquarie Bank and a bunch of private equity financiers including Texas Pacific and Allco Finance Group and others.

Naturally, all the usual stuff comes out - the unions complain about possible off shoring of jobs, politicians complain in parliament about the possible loss of an all-Australian icon, staff complain about an uncertain work environment and the media lap it all up.

Anyway, institutions holding the shares refuse to sell and the whole deal falls down in a blaze of uncertainty in what was possibly the most anti-climactic end to a private equity deal yet.

Anyway, I found this whole thing amusing from start to finish. I would have found it even funnier if I didn't hold shares in Qantas and Macquarie Bank, but this was truly a debacle that ranks highly on our great debacles scale.

The first thing about this story was the degree to which management could not keep it quiet that they were going to attempt a management buy-out. Rumours abounded and bubbled around to the point where the ASX had to issue a please explain. Fortunately, by that point, the consortium funding this was ready to go public and so the deal financially came out. Not before, I'm sure, people read the newspapers and acted on the rumours which were, by that stage, smoking hot.

I'm sure that I'm not the only one who thinks that the ASX took far too long to act to get the rumours addressed. But this was funny stuff.

Anyway, the consortium's takeover attempt goes public and is embraced fully by the Qantas board after some weak attempts to show some form of neutrality. You do have to note at this point in time, and also throughout, very little disclosure has been made as to how many in management or on the board were in on this. It appears that disclosure only takes place these days when possession of the shares in the new entity takes place.

So the terms of the private equity deal are fairly attractive relative to the share price - $5.60 per share prior to a fully-franked dividend of $0.15 per share which means that the takeover offer price is $5.45 per share after the dividend is paid out.

Acceptances are slow coming. That's OK, the consortium is happy with this. They're expecting them bit by bit. But they're still confident that they'll get the required 90% acceptances to allow mandatory acquisition of the remaining shares by the cut-off date.

Meanwhile, some of the institutions are holding out. It's clear that quite a few of them do not want to sell.

One of them, Andrew Sisson from Balanced Equity Management breaks the silence that fund managers usually put up by publicly announcing that the offer by the consortium is simply not good enough.

It is clear at this stage that the bid is now in deep trouble.

It is at about this point, if memory serves me correctly, that the desperate consortium tries to pull a rabbit out of a hat. This was quite novel and really quite amazing for this type of takeover. The consortium extend their offer and says that they'll proceed with only 70% acceptances.

I found this bit hilarious - basically, they were saying that they were happy to allow 30% of the company to remain on the market.

This bit was always going to backfire for several reasons:

  • Retreating to 70% acceptances looks desperate; and
  • A new possibility for investors has emerged.

A new possibility for investors had emerged, and it was one which would have been particularly attractive to some, although admittedly not so attractive to others - investors had effectively been offered a once-in-a-lifetime entry in at the ground floor to a private equity deal involving a management buy-out.

Time was running out now.

To complicate matters, as they do, ever since the board of Qantas announced that they were approving the bid, hedge funds just could not help themselves.

Now what hedge funds do here is very simple. They go out there and, without breaching the mandatory takeover offer rules, they get their hands on as much of the company that they can, while taking advantage of the arbitrage difference between the buy price and the takeover offer price.

As a result of all the shares changing hands, Qantas, which is prevented by law from being owned by more than 49% foreign investors, is suspected to have breached this provision and it is thought that the amount of shares in the hands of overseas hedge funds may have cleared the 49% mark by a good portion.

What is also interesting to note, is that the hedge funds themselves signalled their intention for the fun and games to continue by issuing acceptances for part of their shareholdings in the hope that this activity could be stretched out. More on this later.

Anyway, hedge funds were in it up to their eyeballs and stood to make a killing should the takeover go through.

So the deadline approaches, and the consortium approaches every man and his dog on the share register attempting to get enough acceptances to enable the bid to be extended.

At the deadline, all they had to do was to get 50% acceptances, and an automatic extension of two weeks would have been added to the deadline.

It is at this point that the funniest part of this little arrangement happens.

Leading up to the deadline, it was clear that they had about 47-48% acceptances and they just needed one of the hedge funds to get on board - because it was clear that any of the Australian fund managers who were holding out would not be selling.

One of the hedge funds gives enough acceptances to get the offer over the line - but a full five hours after the offer lapses.

The bid is declared dead, but the consortium is not giving up.

Soon, after the Takeovers Panel rules that they will not be accepting this, and Qantas, and the consortium both publicly declare the bid is dead.

What emerges not long after that is a comedy of errors, as it is discovered that, if they wanted to, the consortium could have chosen to exercise a bit of fine print in the takeover offer that they appeared to be completely unaware of. This point was cut and pasted into the takeover offer at some point, and seemed pretty clear in that if a shareholder had issued a partial acceptance, the bidder could have deemed that a full acceptance had been issued.

If the bidding consortium had chosen to enforce this, this bid would be easily over the line. Of course, it should be noted that a long and costly court battle would have ensued.

Instead they chose not to.

The bid was finally dead.

The big losers from this were the hedge funds - as a result of this failed takeover, they're all having to sell their shares well into the red.

Will this takeover be resurrected? Maybe. They'd want to do it better than this, though. This was a foul-up of monumental proportions.

Disclosure: This blogger owns shares in Qantas Airways Limited and Macquarie Bank Limited.

Standard but necessary disclaimer: This is not advice. Only a complete idiot would think that any of this constituted advice. It's not even vaguely reasonable to consider this to be advice. If you are in any doubt as to the content of this, see a good, independent financial adviser immediately. They do exist.


Plonka said...

Another corker Dikkii. Once again plain english works where finacialese fails miserably...:)

Dikkii said...

Thanks Plonka. A fair amount of events to sift through with this fiasco.

Anonymous said...

This is awesome.

Hey Fez, I have to agree with Plonka above... this kind of language when dealing with stuff that most people already assume everyone should know is just right. Dude if you wrote a book in a similar vein, on dealing with government, taxes, business, legal issues etc etc (of course not at all full of advice, not at all) it could be revolution.

Anonymous said...

oh great. wrong bloody article - I was of course trying to comment on the personal banking not-advice article.

Dikkii said...

Thanks Taj. Nice of you to say.

Of course, I run the risk that using this kinda language for what you ask would leave me open to allegations of merciless cynicism.

But you knew that. And you know I love it.

Maybe after I run out of financial stuff to write about, I'll look into government, taxes, business, legal issues etc.

Until then, I'll stick to what I know best.

I was of course trying to comment on the personal banking not-advice article.

If you were trying to leave a comment at my last post, you would have been unable to. For the first time in my life as a Blogger user, I was required to select "allow" to comments, because it didn't default to it. Weird.

Anonymous said...

Teva's long-held practice is to only pursue transactions that fit our long-term strategy of delivering profitable growth and enhancing our global leadership position while meeting our stringent financial criteria. While Merck's generics business would have been a strategic fit for Teva, the terms of this opportunity did not fully meet our San Diego investment criteria "

Dikkii said...

Teva??? WTF??

Ilanit, you goose. What are you talking about? Or is this a pump and dump kinda thing?