Non-executive directors call offer, made by group including Macquarie Bank and private equity shop Texas Pacific, unacceptable.
December 12 2006: 7:48 PM EST
MELBOURNE (Reuters) -- Australia's Qantas Airways said Wednesday it has received a $8.6 billion (A$10.9 billion) buyout offer led by Macquarie Bank Ltd. and private equity firm Texas Pacific Group at A$5.50 a share.
It said its non-executive directors consider the offer unacceptable. Qantas last traded at A$5.23.
The bidding team has been shaped to ensure it meets ownership caps on Australia's flag carrier, which require the airline to remain majority Australian- owned with no individual owning more than 25 percent. Fasten your seatbelts for a whole new airline industry
The consortium also includes Qantas management Canadian investment firm Onex Corp. and Allco Finance Group.
The news comes just weeks after US Airways (Charts) made a surprise $8 billion offer to buy its bigger rival Delta Air Lines (Charts) in late November.
CORPORATE raiders last night struck a deal worth $11 billion to take over Qantas, after sweetening an offer that was rejected by the airline's board earlier in the day. Airline Partners Australia increased its offer by 10c a share to swing the Qantas board in favour of the deal. A source close to the deal said insiders - after weeks of tense negotiations - were confident an agreement would be signed today. Qantas's non-executive directors earlier said a $5.50 per share cash bid by the consortium was not acceptable, citing the complex terms of the offer. It is understood they were not prepared to accept a $100 million break fee if the deal failed to go through. Most of the conditions have been changed to placate the Qantas directors. Executive directors Geoff Dixon and Peter Gregg, who did not vote on the offer because it reportedly involves a 1 per cent stake for senior managers, later backed the rejection in a note to staff. "The Qantas decision has the support of all directors - including the non-executive directors, Peter Gregg and myself - and the senior executive team at Qantas," Mr Dixon said. A source close to the talks said the airline had told the bidders to "get real", prompting the revised offer late last night. The source said the board believed the original offer was not in the best interests of shareholders or the company. But Qantas was not "doing a Coles-Myer" and sending its suitors away. Negotiations were not hostile. A source involved with the bidders indicated there were no unusual conditions in the bid. News of the rejection of the original offer caused Qantas shares to plummet below $5 when they began trading after a brief suspension, but they recovered to close down 14c at $5.09. The carrier's main rival, Virgin Blue, added to the pain by announcing it would push ahead with plans to launch an international airline on the flying kangaroo's lucrative Pacific route. The original takeover proposal would have seen Qantas 60 per cent Australian-owned, giving David Coe's Allco Finance Group 11 per cent of the airline, Allco Equity Group about 34 per cent and Macquarie Bank less than 15 per cent. Offshore investors, including Texas Pacific Group and Onex, would hold less than 40 per cent of the airline, with no single investor holding more than 15 per cent. It is understood the move to increase the bid to $5.60 per share was linked to bringing in other parties to reduce the exposure of the Allco group. Allco Equity, headed by Peter Yates, is related to Allco Finance and the group was looking at a combined stake of up to 46 per cent. Allco leases aircraft to Qantas and has two former airline chiefs, Rod Eddington and David Turnbull, on its board. While it is understood Sir Rod has no interest in joining the Qantas board or being involved in its operations, Mr Turnbull is tipped to join Mr Coe and possibly former Telstra chairman Bob Mansfield on the board. Analysts viewed the board rejection of the original offer as part of negotiating tactics. "I think rather than being a landmark moment in the negotiation, they have done it to respond to the speculation," JP Morgan analyst Matt Crowe said last night in anticipation of a revised offer. "I don't think we interpret it as being the end of anything, but it shows they're still a fair way apart." The deal would see the foreign component of the deal nine percentage points below the foreign investment limit and about 5 per cent less than the stakes held by foreign investors on November 8. The structure is designed to avoid reviews by the Foreign Investment Review Board and Australian Competition and Consumer Commission, though the federal Government has said it will still look at national interest issues.
Experts have warned a highly leveraged Qantas is more vulnerable to downturns from external shocks such as terrorist attacks and the major credit agencies say a takeover will reduce the airline's credit rating.
Moody's Investors Service said yesterday this could involve a "multi-notch" downgrade.
However, analysts said that popular suggestions the consortium could cut and run in a downturn were overblown.
There are also fears the new owners would be quicker to axe unprofitable regional routes kept open by Qantas for political reasons. And unions are worried sections of the company would be sold off and more work such as maintenance and call centres would be sent offshore.
Analysts say there are about $3 billion worth of assets open to review.
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