BREAKFAST DEALS: Qantas hotshot

Qantas and Emirates may have a code-sharing deal, while Fortescue buys time with an asset sale.

Qantas Airways looks like it has at least a code-sharing deal with Emirates, perhaps even more after negotiations between Alan Joyce and Tim Clark. Meanwhile, Fortescue Metals Group has bought itself time against growing warnings that an equity issue is needed. Elsewhere, a new M&A report shows Chinese companies are getting more savvy when they’re bidding for local players, APA Group finally looks to have Hastings Diversified Utilities Group (no more questions) and ACP’s price tag has attracted the attention of a Fairfax Media shareholder baiting for a break-up.

Qantas Airways, Emirates

Qantas Airways chief executive Alan Joyce might be about to announce a major win this morning, with a report indicating that airline executive has talked Emirates into considering a deeper relationship.

Initial whispers were that Emirates chief executive Tim Clark had flown into Sydney to negotiate a relatively simple code-sharing arrangement. Most of the attention settled on whether Qantas would axe its flights to Frankfurt.

But The Australian Financial Review understands that the "most likely outcome” is that Joyce will be able to announce a deeper joint-venture style alliance.

The newspaper says negotiations were taking place well into last night and if the final details of such a joint venture can’t be nailed down, a code-sharing arrangement will be announced with a joint venture to be visited later.

Previous reports have indicated that Qantas has pushed Emirates for something beyond a code-sharing deal, only to be rebuffed. If Joyce can pull this off, it’ll be interesting to see whether the airline reveals precisely how it persuaded the Middle Easterners to go the extra mile.

This is a much needed boost for Joyce who watched joint venture plans for Asia fall apart after failing to find an ideal partner.

Analysts at Macquarie estimate that a code-sharing deal could secure an extra $90 million in earnings and make big dents in the company’s plan to drag its international arm from a $450 million loss in 2012 to breakeven in 2014.

We’ll have to wait and see how the talks panned out last night but, regardless of what happens today, it looks like it’s going to be a good one for Joyce.

Fortescue Metals Group

Fortescue Metals Group has bought itself time for the iron ore price to recover by swiftly selling its Solomon power station for $US300 million ($292.8 million) to Canada’s TransAlta, with a sale of the North Star magnetite deposit expected to follow.

That’s the consensus that emerged from yesterday’s announcement, with the iron ore miner moving swiftly douse speculation that it could face an equity raising.

The situation facing Fortescue founder Andrew ‘Twiggy’ Forrest and chief executive Nev Power is that the iron ore miner can only cope with price at current levels for so long.

It should be noted that analysts broadly believe that the iron ore price will recovery some ground towards the end of the year. On that basis, the Fortescue plan will work.

But there is also serious concern that if a sustainable recovery does not happen in the iron ore price, that Fortescue will be forced to raise equity in order to tend to its debt burden.

Fairfax understands that Fortescue management was on the phone to bankers in the Asia-Pacific trying to rouse up a $1.5 billion syndicated loan.

Freehills Public Mergers and Acquisitions Report

The Australian mergers and acquisitions market is continuing to ebb and flow with the volatility of the market, according to a new report.

Australian law firm Freehills has released its fourth Public Mergers and Acquisitions Report says that 83 deals were announced last financial year, the lowest level since the 2009 fiscal year.

"Deals were announced in ‘bursts’, reflecting the extremely volatile nature of Australian and global markets in recent times, but also suggesting that bidders are looking to announce transitions during particular ‘windows of opportunity’, when market conditions offer better prospects.” said Freehills Partner Simon Reed.

Encouragingly, the value of the deals came in at $63 billion, which was 25 per cent below the previous year, which could have been worse.

Additionally, Chinese bidders have improved their success rates with 83 per cent of its announced deals for Australian companies, compared to 57 per cent last year.

The thing to look out for in the coming year is what will replace the coal deals. Freehills says that coal deals accounted for 10 per cent of total deals in fiscal 2012, which is likely to drop in 2013 if the collapse of the Whitehaven privatisation is anything to go by.

If the mining boom really is cooling down, the market is really going to need to calm down for next year’s numbers to hold their ground.

APA Group, Hastings Diversified Utilities Fund

It looks like gas pipeline owner APA Group can rest assured that Hastings Diversified Utilities Fund won’t be snatched away from it by a Canadian pension fund.

Previous reports have indicated that Caisse de depot et placement du Quebec, one half of initial rival bidder Pipeline Partners Australia, has been trying to cobble together enough interest to trump APA’s $1.4 billion cash-and-scrip offer.

The Australian Financial Review says that the fund’s search hasn’t unearthed what was needed and that APA will be victorious.

The newspaper understands that CDPQ has been talking to Singaporean wealth fund GIC, but the discussions wrapped up without a bid.

The news is reflective of the widespread desire by big government pension funds for regulated infrastructure assets that deliver steady, long-term returns in a time of serious volatility. The kind of volatility that’s killed the interest of other marker participants, as indicated by the Freehills report.

Fairfax Media, Nine Entertainment

It hasn’t taken long for someone with a stake in Fairfax Media to use the encouraging Nine Entertainment sale of ACP Magazines to call for a company break-up. Perhaps unsurprisingly, it’s Alan Gray fund manager Simon Marais.

Marais says the ACP’s $500 million sale was a "reasonable price”.

"It does mean that if the right deal comes along it can happen," he told the newspaper. "I think the price is pretty good for what it was sold for."

Alan Gray has about nine per cent of the Fairfax register, which is worth about $88 million. That company’s $976 million market capitalisation hardly reflects that value that could be unlocked in a break-up.

The Australian suggests that Lachlan Murdoch, fresh from securing the other half of DMG Radio, will have a look at Fairfax’s radio assets, with Marais indicating that he would support such a move if a "reasonable” offer were tabled.

The prospect of a Murdoch offer could create an interesting dynamic if John Singleton re-emerged. The reason being that Singleton is a friend of Fairfax major shareholder Gina Rinehart.

Can you imagine the headache for the board if the two combined to harass them at the same time?

Wrapping up

ANZ Bank has shown there’s still life in the Australian bank bond phase…in the US that is. According to News Corp publications ANZ has tapped the American market for $US3 billion ($2.95 billion) with three tranches.

Two of the tranches are mortgage-linked covered bonds, according to the reports, which of course earns the AAA ratings from Moody’s and Standard & Poor’s.

Last week, National Australia Bank reportedly struggled to fill its 250 million pound ($383 million) bond issue, sparking concerns that the covered bond demand might be ebbing.

However, NAB’s offer came on the back of CBA’s 750 million pound offer and the fact that ANZ has tapped the US might mean that investors can still be found, but you’ve got to go hunting for them.

Meanwhile, The Australian Financial Review expects Crown to receive regulatory approval to increase its stake in Echo Entertainment within a month.

That’s good timing, because Consolidated Media Holdings is expecting to have a firm proposal from News Limited, which majority owner James Packer would then put into Crown’s Sydney casino push, by the end of the month.

Elsewhere, Alesco Corporation chairman Mark Luby has stepped away from a proposal to push for performance rights for chief executive Peter Boyd to vest early if the DuluxGroup takeover offer goes through.


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