DataRoom AM: Qantas baggage drop

A plane sale and leaseback option could straighten Qantas’ tailspin, while Kirin Holdings may be looking to offload its National Foods dairy assets.

On the back of the news that Qantas Airways’ credit rating has been shifted to ‘junk’ status, plenty of capital raising options are coming out of the woodwork. However four of the five options appear barely feasible, leaving the prospect of a $5 billion plane sale and leaseback option as likely the best bet – and even that proposal is foggy.

Elsewhere, Kirin Holdings’ Australian dairy assets are rumoured to be up for grabs, Murray Goulburn Co-operative receives a boost in its push to buy Warrnambool Cheese and Butter Factory, Nine Entertainment has a disappointing first day on the ASX and Commonwealth Bank of Australia makes progress on plans to spin off CFS Retail property.

Qantas Airways

Qantas Airways boss Alan Joyce received the news he desperately didn’t want on Friday with S&P slashing his company’s credit rating to ‘junk’. On the back of a profit warning, that really stings.

The national carrier isn’t alone with its pain, however, with shadow treasurer Chris Bowen indicating the whole country may be willing to share its burden.

Labor’s Bowen told Sky News on Sunday that the government could play a role in “assisting” it in overcoming the problem of accessing capital, even if the Abbott government has shown little inclination for that possibility.

Bowen was not forthcoming on just what kind of assistance the opposition would be willing to back, only noting that Labor didn’t believe a relaxation of foreign ownership restrictions was the right move.

That leads us to the biggest airline in Asia, state-owned China Southern, which reportedly held detailed discussions with former Qantas boss Geoff Dixon when he was agitating for change in the national carrier last year.

According to The Australian, there are some suggestions China Southern Airlines was prepared to take a 19.9 per cent shareholding in Qantas, but the talks progressed too slowly and eventually Dixon and his group of agitators exited.

Since then, China Southern has reached a codeshare agreement with Qantas, which may see it come back into the picture for an equity stake but only if the Qantas Sale Act is repealed, according to the report.

One can imagine the government having fits about the prospect of a state-owned Chinese outfit taking a major share of Qantas given what eventuated with Archer Daniels Midland and GrainCorp, so don’t expect too much to come out of these rumours anytime soon.

There are reportedly other opportunities emerging for the airline, however the best opportunity for Qantas to avoid a heavily dilutive capital raising in the near future is likely to be the purchase of some of its planes by a consortium led by former Macquarie Group banker Greg Woolley.

According to the Australian Financial Review, Woolley has already gained $1 billion worth of commitments from foreign and local investors to pursue a $5 billion plan to buy Qantas planes and then lease them back to the airline.

It would reportedly require the federal government to guarantee the lease payments.

Qantas is no doubt waiting patiently to hear the full details of the proposal and see if the government will play ball.

The other capital options put forward include the spin-off of either Jetstar Asia or its frequent flyer program, though the former is likely its best growth option moving forward and the latter is likely too complicated.

National Foods, Dairy Farmers, Kirin Holdings

While much focus has been centred on the Warrnambool Cheese and Butter Factory takeover saga, one rarely discussed player in the battle for its control may be quietly seeking bids of its own.

According to The Australian, Japan’s Kirin Holdings could be looking to offload the dairy division of its National Foods business.

The news follows a recent report that Italy’s Parmalat was circling Western Australian-based Harvey Fresh.

While there may be merit to the speculation, there must be doubts about the likelihood for the former to go ahead given Kirin has been adamant on the worth of the food and beverage sector.

It has steadily bought a major position in Australia through purchases of National Foods, Dairy Farmers and Lion Nathan. It would seem odd to make a partial exit now, especially given the rumours suggest a sale of the dairy assets would only recoup $1 billion, which is well below the amount paid for them.

In 2007, Kirin paid $2.5 billion for dairy and juice producer National Foods and the next year it bought Dairy Farmers for $910 million. While not all of National Foods – which owns the Pura Milk brand – is dairy, it is believed Kirin’s total dairy purchases would amount to around $2.5 billion.

In October, Kirin threw itself into the fight for WCB by buying a 10 per cent stake in the takeover target, which was aimed at protecting its relationship with WCB. It remains unclear which party Kirin would like to win out in the battle, with Canada’s Saputo considered its least preferred bidder.

According to The Australian, however, that view could quickly turn around if Saputo made a bid for its dairy assets. The other likely candidate to pitch a bid for Kirin’s dairy assets is New Zealand’s Fonterra, which Kirin reportedly courted in regard to the assets a few months ago.

Meanwhile, Murray Goulburn Co-operative has received a boost in its bid for WCB, with a key Victorian industry body throwing its weight behind the proposal, according to The Australian.

The United Dairy Farmers of Victoria believe a “national champion” is required to get the best out of the sector and Murray Goulburn fits that bill.

"We need enough scale in Australian hands to take advantage of those markets in the region that are opening up for us,” UDV president Kerry Callow told The Australian.

In the meantime, Saputo and Bega Cheese, which have both received regulatory approval for a WCB takeover, are likely to extend their bid deadlines soon as they are due to expire this week. At the moment Saputo is handcuffed as the Takeovers Panel has ruled it cannot take acceptances for its offer while an investigation is carried out to see if it misled WCB shareholders.

Nine Entertainment, IPO market

Nine Entertainment’s lacklustre debut on the ASX last Friday has prompted some commentators to call the end of the current IPO boom – but they may have jumped the gun.

After opening down 1.5 per cent, Nine closed 3.4 per cent below its listing price of $2.05 a share, despite its widely-tipped first-day gains after an oversubscribed offer at the lowest end of the pricing range.

But last week’s three big, mediocre floats – Nine Entertainment, Industria REIT and Dick Smith Holdings – are arguably also the three poorest growth prospects among the flurry of significant IPOs we are watching in the final quarter of the year. Among the best growth prospects have been Veda Group, OzForex and Freelancer, all of which commanded substantial growth on debut.

Veda, incidentally, tacked on another 10 per cent on Friday to the 40 per cent it added on debut the day before.

There are three IPOs of note left for the year: Pact Group, Cover-More and Vocation. If two of these fail to flatter then it’s time to start worrying about float fatigue and whether the IPO window may indeed be closing. One suspects, however, that those companies may see a return to form for the IPO market.

Wrapping up

The Commonwealth Bank of Australia is pushing on with plans to spin off its CFS Retail Property trust in the latest major property sector shake-up, according to The Australian. The deal will likely see CFS renamed Centre Retail Management with CBA to receive between $400 million and $500 million for its management rights in the entity.

Elsewhere, ASX-listed Asciano is mulling a joint bid for the Port of Newcastle with Japan’s Marubeni Corporation and potentially Deutsche Asset & Wealth Management as well, according to the AFR. Expectations are that the New South Wales government-owned port could sell for close to $1 billion.

Finally, Michael O’Keefe, who made his fortune while leading coal group Riversdale Mining, has turned his hand to iron ore, presiding over a merger between ASX-listed Mamba Minerals and Canada’s Champion Iron Mines. O’Keefe bought a stake in Mamba last year and now chairs the group, which will remain listed on the ASX under the new name of Champion Iron. Its shares rose more than 14 per cent on the news.