Qantas Airways Limited

The private equity bid for Qantas is fast becoming a political hot potato. Politicians on both sides are worried about what may become of the iconic national carrier under private equity ownership. In particular, there are concerns that a small hiccup could leave a highly leveraged Qantas needing a government bail-out. The inevitable cost-cutting and asset sales are also not very politically appealing.

We’ve been negative on Qantas for a long time. But we upgraded the recommendation to Hold on the takeover announcement, as we usually do with any takeover. The reason is that most takeovers end up being successful, sometimes wildly so, and you might as well wait for them to be wrapped up. But with quite a few hurdles still to jump, we’re becoming less convinced that Airline Partners will end up acquiring Qantas, despite the undoubted political clout of consortium member Macquarie Bank. The market price is now also 5% below the $5.45 bid price, and 3% below our last update on 16 Jan 07 (Hold – $5.36).

In hindsight we may have upgraded to Hold too hastily. If the bid falls over, the stock could easily fall back to $4.00. But if it goes through, you’ll only get another 25 cents. All in all, we think the risks are increasing and, as we’ve never liked the airline business anyway, we’ve reconsidered our view. We’re downgrading to SELL again.
Tim Searles