THE DISTILLERY: Tiger's thorn

Jotters say the ACCC's Virgin-Tiger approval was inevitable, but one suggests a dilution of capacity wars could hurt customers' hip pockets.

It's a bumper corporate edition of The Distillery this morning with two big company developments. Firstly, the Australian Competition and Consumer Commission has given into the inevitable and approved Virgin Australia's acquisition of a majority stake in Tiger Australia, with the business scribes saying Rod Sims had little choice in the matter. Meanwhile, Woodside Petroleum has put yield on the table after issuing a special dividend and increasing its payout ratio. Not a bad move, say the commentators, when you're capex budget has been reined in.

But first, let's take to the skies. Almost every business commentator on the Virgin-Tiger deal has offered a metaphor to illustrate what the consumer watchdog has done with its approval. In the Distiller's relatively sober appraisal, The Australian Financial Review's Andrew Cleary has the best one.

"Virgin Australia has dodged the competition regulator’s version of a poison pill with its takeover of Tiger Australia coming free of conditions – specifically any mandating the addition of new aircraft. The fear within Virgin – and at Qantas for that matter – had been that the Australian Competition and Consumer Commission would demand a commitment to grow the Tiger fleet far more iron-clad than chief executive John Borghetti’s vague target of 'up to' 35 aircraft by 2018."

The fact is that Australian travellers have been getting a great deal of late. Two things had to end – the first of which are the skinny margins that the two major carriers have been wearing from the capacity war, as explained by Fairfax's Matt O'Sullivan.

"Travellers are about to realise how good they've had it flying on domestic routes over the past two years. After an era of super-cheap fares, they face some back-pocket pain from the competition regulator freeing up Virgin Australia to forge ahead with its bid for a controlling stake in Tiger Australia."

The second thing that simply had to end, as detailed by Fairfax's Elizabeth Knight, was Tiger's status as an independent operator, because it was getting absolutely smashed out there. This was the central argument put to the Commission by Virgin and Tiger.

"Tiger Australia's losses had been mounting, it was fighting reputational issues on safety – having been grounded for six weeks in 2011 – and it was operating at sub-economic scale. The ACCC was persuaded that the new chief executive of Tiger Australia's parent, Tiger Holdings, was a commercial businessman with no stomach for sustaining mounting losses that have been running at about $60 million per year. Once the ACCC was convinced it was a 'deal or depart' choice, it could throw away the handbook, the Competition Act, and shred the submissions from those arguing against the deal...Whether Virgin and Tiger operate in the same market (i.e. the leisure end) became academic. Instead it's binary. Tiger Airlines will exist in future only under the new Virgin ownership structure. Otherwise it disappears."

The Australian's John Durie explains that the result is an effective return to an Australian airline duopoly, which is actually quite a concession for a competition regulator to make. They wouldn't like only two players, in any context – but this was unavoidable.

Business Spectator's Stephen Bartholomeusz details how Virgin will take its new weapons up to market leader Qantas.

"The clearance means that Virgin, after the earlier acquisition of SkyWest, can now match Qantas’ tiered domestic offerings – Qantas, QantasLink and Jetstar – with three brands of its own, each lining up against a competitor brand with, Virgin claims, a higher cost base than its own. Virgin’s John Borghetti has promised to ramp up the Tiger and SkyWest fleets aggressively to attack Qantas and, in the process, provide lower-priced offerings to protect his core Virgin brand from Jetstar as it shifts up-market to try to attract more higher-yielding passengers. In fact he has indicated, but not guaranteed, that the Tiger fleet in Australia will be expanded to 35 aircraft by 2018."

Meanwhile, in regards to Woodside's announcement that it will issue a special dividend and increase its payout ratio, The Australian Financial Review's Chanticleer columnist Tony Boyd argues it must be emphasised that chief executive Peter Coleman has not done anything dramatic.

"In fact it is a return to common sense. A company sitting on a lot of cash and with strong cash flows is returning cash to shareholders in the shape of a $520 million special dividend. Of greater significance is the decision to lift Woodside’s payout ratio from 55 per cent to 80 per cent. It promises to maintain that for several years. A stock yielding 3.3 per cent is now yielding about 6 per cent before the benefit of franking credits. The reason Woodside’s actions might appear radical is because the resources sector, including the big miners BHP Billiton and Rio Tinto, has lost sight of its duty to shareholders."

While it's not a radical policy, The Australian Financial Review's Matthew Stevens illustrates how it's a radical change in direction.

"Back in December, to the muted chagrin of some senior shareholders, Woodside’s Peter Coleman said he was 'looking forward' to a simultaneous pursuit of Australia’s Browse, East Timor’s Sunrise and Israel’s Leviathan liquid natural gas projects. In announcing the $US1.2 billion purchase of 30 per cent of Leviathan, Coleman assured the market that 'growth would be the first cab off the capital allocation rank'. My, how things have changed."

The Australian's John Durie reports in a separate piece how rapidly Woodside's appeal has changed as a resources play thanks to the latest announcement.

"Michael Chaney returned to the market's good books yesterday due to his, albeit token, 63-cents-a-share special dividend at Woodside after the chairman decided the company had surplus capital that would be better off in shareholder hands. That sort of statement is what resources shareholders have been seeking for some time, but the big miners – led by BHP Billiton and Rio Tinto – have maintained that they are the best guardians of shareholder funds. Stockbrokers report big offshore flows into the Australian stockmarket in the pursuit of yield, and all of a sudden Woodside has become as good at yield play as one of the big banks."

In a time where investors are falling over themselves for yield, the obvious question is why the market didn't take the bait from Woodside in the form of suggestions that a special dividend could be coming. Fairfax's Malcolm Maiden tackles that very point.

"Why didn't Woodside shares rise strongly before speculation became fact? A possible answer is that between the April 12 announcement and Tuesday's dividend news, the top-down investing herd was in charge, and running in the other direction. Woodside was heavily hinting that cash returns were coming, but the resources sector at large was retreating on concerns about global growth. Its shares fell by 5 per cent between April 12 and Monday. The energy company component of the S&P/ASX 200 share index that Woodside dominates fell by 5.3 per cent, and the materials index that includes the miners fell by 5.8 per cent: bottom-up sentiment may have been trampled in the bear stampede."

In other news, The Australian's Blair Speedy gives his takes on the long-awaited consolidation of the milk processing sector, adding for good measure that it's not the milk where the profits are made, but the cheese, butter and powdered milk that you can make out of it.

Elsewhere, The Australian's Jakarta correspondent Peter Alford says Australian graziers might be able to breathe a little easier in relation to Indonesian cattle exports thanks to inflation problems and petrol price rises. Indonesia is the great untold economic story for Australia's future prosperity. The Distillery expects Alford's byline to be popping up with some more very good yarns.

And finally, if you're interested in the bind that Discovery Metals finds itself in with its capital raising and the battle with major shareholder and former suitor Cathay Fortune, read The Australian's Bryan Frith this morning. He delivers the lot.