Constructing a Qantas defence

Despite its plummeting share price, being taken over is not Qantas' main fear. The real danger is aggressive stake building by an activist investor and to defend against that Qantas needs to fix its international arm.

When chief executives blame short sellers for a share price slump, as Alan Joyce of Qantas just did, the underlying meaning is clear: "that vanishing value is not my fault." The revelation on Tuesday that the airline has re-formed its hostile bid defence team was good for an 11 per cent share price pop. That'll teach those annoying shorts.

A takeover is not Qantas' real fear. True, its $6 billion enterprise value has dropped to levels last seen after Lehman Brothers collapsed, and it has just warned of a 90 per cent drop in pre-tax profits. But the airline can hide behind the Qantas Sale Act, limiting ownership by foreign investors to 49 per cent. The real danger to the current management is aggressive stake building by an activist investor.

Short sellers were doubtless involved in last week's one-third sell-off. But if investors had full faith in Joyce's turnround plans for its international arm – where losses will almost double to $450 million, of which just $100 million is restructuring costs – and did not fear a capital raising, the share price would better reflect it.

Joyce maintains, as any good chief executive should, that Qantas is worth far more than its current $2.4 billion market value. He is right in many ways. For a start, it has about $3 billion of cash on its books. On top of that, it has a profitable domestic operation and can defer some expenditure by delaying new aircraft. Although that would have an impact given its already ageing fleet, the airline is nowhere near death's door in financial terms. This would indeed be a good time for an activist to start building a stake.

Being prepared is a smart move. Joyce is a member of the group's reactivated defence team. The danger is that constructing technical protections distracts from Qantas' best defence – fixing its international arm to produce the results needed to convince sceptical investors.

Copyright The Financial Times Limited 2012.

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