DataRoom AM: Qantas quandary

Rumours of a float of Qantas Airways’ frequent flyer division have surfaced once more, but could the airline really hive off 40 per cent in a division that is valued more highly by analysts than the whole company?

Still, the troubled airline will be looking at any (and every) option to raise funds.

Elsewhere, ANZ Banking Group mulls Asian purchases, privatisation is on the agenda in New South Wales and Victoria, the number of suitors for Gunns Ltd narrows and Australia’s dairy sector continues to attract plenty of offshore interest.

Qantas Airways

When it is known a company is desperate to secure new funds, rumours are an easy sell. Hence we shouldn’t get too carried away by the latest speculation of a float of Qantas Airways’ frequent flyer division. After all, we’ve been here before, with expectations of an imminent float of the division time and time again.

What has changed between then and now that would make Qantas management keen to pursue the option? Are the risks and barriers to an IPO now less of a worry given the company faces severe financial challenges?

The latest speculation can be found on The Australian Financial Review, with the report suggesting a partial float of the frequent flyer division was “increasingly likely”. (It should be noted that ‘increasingly likely’ would be coming off a low base, with the most recent public comments from Qantas suggesting it was off the near-term agenda.)

Back in 2008, Qantas came close to spinning off 40 per cent of the frequent flyer division before opting out due to the turbulence on markets. At the time the division was valued at around $2.5 billion, which is about $60 million more than the current value of the whole company.

And this represents a big problem for any deal.

If the frequent flyer program is worth $2.5 billion (or the $3 billion quoted in the AFR), what does it say about the rest of the Qantas business? And could the company really hope to extract true value out of any deal?

The frequent flyer division, renamed Qantas Loyalty last year, achieved record profits of $260 million in the latest financial year, meaning a deal done with a valuation of $3 billion would assume a price-to-earnings valuation of around 11.5 times.

As a comparison, the most recent float of an airline’s frequent flyer division was seen in Brazil by Gol, with its Smiles frequent flyer operations listing at a price to earnings ratio of 13 times.

At this ratio, Qantas Loyalty would be worth close to $3.5 billion, meaning a 40 per cent sale should recoup $1.4 billion.

Given the broad strength on markets and relatively high company valuations, $3.5 billion would be a reasonable valuation expectation – but not when the entire company is valued at just $2.4 billion.

Tempting though the public listing of the division may be, Qantas will likely not extract the value it would desire, leaving other options preferable to shore up its balance sheet. It may, however, attempt to entice private equity firms to take a small slice of the business for a few hundred million dollars.

ANZ Banking Group

ANZ Banking Group is continuing its hunt for suitable acquisitions in Asia despite falling short in attempts to buy a Hong Kong bank over recent years.

The bank’s chief executive Mike Smith believes that the troubles continuing to cripple European banks will see them further their global divestment plans, leaving Asian assets up for grabs.

"We continue to look but there isn't a lot out there," he told The Wall Street Journal.

"I have always been patient. Something will happen at some stage. I still believe that some of the European bank assets will have to be sold off."

ANZ will, however, struggle to seal a deal in Hong Kong, a market in which it was keen to gain a foothold given the scarcity of assets left out there and the high valuations placed on recent deals.

The comments from Smith came as Citi analyst Craig Williams told clients ANZ could be ready to make a move on Standard Chartered.

The UK and Hong Kong-listed bank is one of Asia’s largest banks, but with a valuation of over $55 billion, it would be a bold buy, even for a company as large as ANZ.

We will place it in the highly unlikely pile, as the Australian bank would almost certainly view such a deal as being too risky.

Meanwhile, the AFR has reported that ANZ may offload its 17 per cent stake in China’s Bank of Tianjin and its 24 per cent shareholding in AmBank Group of Malaysia.

Privatisations, Newcastle Port, Port of Melbourne

The nation’s busiest port, the Port of Melbourne, looks increasingly likely to be put on the market by the Victorian government.

Victorian treasurer Michael O’Brien hinted at the asset sale, as Victoria, like most governments around the country, looks to shore up its budget.

According to The Australian, there is growing support for a $6 billion sale amid Victorian MPs, with O’Brien saying yesterday the government was closely looking at all assets to determine whether government ownership remained the best option.

The major hurdle to a sale remains Victorian Premier Denis Napthine, who has previously outlined concerns a privatisation of the port would cause problems with plans to build a port at Hastings, south of Melbourne.

The Labor opposition has said it would look to sell the Port of Melbourne should it win the next state election.

Meanwhile, New South Wales is pushing ahead with port sales of its own, with firms jostling for position to buy the $700 million Newcastle Port.

Asciano Ltd, Hastings Fund Management and Deutsche Asset & Wealth Management are separately seen trying to entice a Japanese joint venture partner to team on a bid.

Japanese firms are viewed as preferable given half the coal exported from Newcastle goes to the Land of the Rising Sun.

The NSW government has set a bid deadline of May as it hopes to secure another profitable deal in the wake of the successful divestment of Port Kembla and Port Botany.

Bright Food Group, dairy sector

Chinese-based Bright Food Group has continued to boost its Australian portfolio through the purchase of WA dairy firm Mundella Foods. The state-owned Bright has not disclosed the purchase price.

It comes amid reports Bright may be interested in claiming a slice in Victoria’s privately owned United Dairy Power.

There is also speculation that WA-based Harvey Fresh is about to fall into the hands of Italy’s Parmalat, while Canada’s Saputo leads in the heated race for Warrnambool Cheese and Butter.

Bega Cheese has also been rumoured to be in the sights of New Zealand’s Fonterra, meaning Australian-owned dairy producers will likely be few and far between by the end of the year.

Gunns Ltd

The list of interested firms in Gunns Ltd will soon be cut to six, according to the firm’s receivers, as the fight for the bankrupt Tasmanian timber company nears an end.

Receiver KordaMentha yesterday said it had received 20 indicative bids for Gunns, with the six leading candidates required to submit final bids by March 31.

The company’s assets have received interest from the Americas, Asia Pacific and Europe, though it is hard to put a valuation on the firm that met severe backlash for its Tasmanian pulp mill plans.

It collapsed under the weight of large debts in 2012.

It is not clear whether the winning bidder will end up pursuing the pulp mill, with some potential buyers seen only to be chasing the land and tree assets of the firm.

Wrapping up

Newcrest Mining, which is still chasing a share price recovery after a horrific 2013, has secured a fresh $US200 million ($222 million) loan facility with a new lender. The gold miner said the terms of the three-year loan facility were consistent with its existing facilities. The latest deal follows a similar one in October, where it secured $450 million in bilateral loan facilities from two banks.

Sticking with resources, Woodside Petroleum has sealed a deal with Chubu Electric Power to supply up to 1.5 million tonnes of LNG over three years from April. The agreement largely relates to previously uncommitted volumes from the company’s Pluto LNG project.

Meanwhile, Rio Tinto has maintained its stake in Canadian miner Turquoise Hill Resources after committing to purchase $1.3 billion worth of stock in Turquoise’s latest capital raising. The raising was largely brought about due to debts owed to Rio by Turquoise falling due in January. The two miners are working together on the mammoth Oyu Tolgoi mine in Mongolia.

Elsewhere, Link Market Services has announced plans to purchase Deutsche Bank AG’s registrar services GmbH as part of a European expansion. The share registrar did not disclose the value of the deal, which saw it outbid rival Computershare at the end of a six-month auction process.

Finally, REA Group, the owner of realestate.com.au, will take over control of rental application service 1Form.com after paying $15 million to acquire its parent, 1Form Online Pty Ltd.