KEY POINTS:
Almost one-third of Qantas is now in the hands of Airline Partners Australia, the Macquarie Bank-led consortium trying to take control of Australia's flag carrier.
But as the deadline for the required 90 per cent stakeholding was pushed back two weeks, there was a growing sense that the predator stalking the Flying Roo may itself become corporate roadkill - or incur considerable pain by significantly lowering its targeted stake.
One of Australia's biggest takeovers since SingTel's A$14 billion ($15.8 billion) buyout of telecommunications carrier Optus, the A$11.1 billion bid is threatened by the rejection of two key stakeholders and the belief that the airline's rosy balance sheet and share price mean APA has undervalued it.
Yet many analysts suggest that given the volatility of the financial skies in which airlines routinely operate - and at times crash to earth - the bid may be the best on offer. While Qantas has survived remarkably well through soaring oil prices and other shocks such as terrorism, Sars and avian flu, more damaging storms may lie ahead.
As it stands, the future of Qantas is far from clear. It is on the verge of major expansion, with a new fleet of aircraft on order and a growing foothold in Asia. The group's sale has the approval of the Government and corporate regulators. Its profit forecasts are blue sky.
But who will own the airline? And what will happen if the APA bid fails?
On the face of it, there is little Australia should fear from the sale. The consortium's structure, foreign investment rules and a legally enforceable deed of undertaking with the Government ensure continuing Australian majority ownership and control, and the retention of headquarters, maintenance and other major operations within the country.
Competition concerns have been addressed and settled by the Australian Competition and Consumer Commission. Both sides of politics are comfortable with the sale. The new owners are bound to make major aircraft and route extensions.
The turbulence lies in the refusal of UBS Global Asset Management and Balanced Equity Management to sell the more than 10 per cent of shares they either own or control, thwarting the 90 per cent ownership upon which the APA bid depends.
APA is a consortium of Australian, US and Canadian investors formed to launch a bid for Qantas late last year.
Initially there were serious competition concerns - Macquarie's controlling stake in Sydney Airport high among them, but also including aircraft leasing, domestic and international passenger services, catering, ticketing reservations and the manufacture and supply of aircraft parts.
These were settled on March 1, when ACCC chairman Graham Samuel approved the bid, saying the deal was "unlikely to have the effect of substantially lessening competition in any relevant market".
The previous December APA had offered Qantas a non-binding proposal to acquire 100 per cent of the airline, conditional on acceptance by 90 per cent of shareholders. Its offer of A$5.50 a share was rejected, because of both price and the complexity of conditions.
Within days, in what Qantas chairwoman Margaret Jackson declared a "very momentous day", the airline's board accepted a higher offer of A$5.60 with fewer conditions. In reality, the offer included an already-committed A15c-a-share special dividend, giving an effective price of A$5.45. Almost immediately, storm clouds began gathering. UBS, which now has more than 10 per cent, made it clear it was unhappy with the offer. Balanced Equity, with 4 per cent, followed suit.
Between them they can effectively block the 90 per cent target APA needs to satisfy its bankers through complete control of cash flow and assets. With that holding, APA could also compulsorily acquire the rest.
This week brought further developments. Credit Suisse announced that it had gained a 5.9 per cent stake in Qantas, following the earlier news that Deutsche Bank had increased its holding to 8.4 per cent.
At issue is the value APA has placed upon Qantas. UBS and Balanced Equity want more, particularly after Qantas' latest earnings forecast put its expected 2007-08 pretax profit at a record A$1.23 billion. Balanced Equity confirmed its refusal this week.
Jackson was outraged, telling the Australian Financial Review that Qantas would be "dangerously destabilised" if the deal fell through because hedge funds would dump the 40 per cent of the airline they held. She said the market would have to find up to A$5 billion in equity to replace this, hammering the airline's share price. But some analysts claim that what hedge funds dump, others will buy.
APA refuses to blink, saying last Monday: "The fact that one institutional shareholder has declined the offer in no way deters us from successfully completing this transaction with the overwhelming majority of shareholders who support it."
The consortium was, it said, considering a range of options to ensure successful completion of its offer.
In fact, its options are limited. Corporate rules prevent APA from simply lifting its offer, as no increases are allowed after a bid becomes final. It could pack up its tent and walk away. It could drop the bid, wait the required time, then issue a new, higher, offer. Or it could switch to a deed of arrangement requiring 75 per cent acceptance, but denying APA absolute control.
While it ponders the options and lobbies shareholders to sell, APA has extended the closing date for its offer from next Tuesday to April 20.
Beyond this lie several other uncertainties. Politically, the deal is safe. The Cabinet has approved the buyout - despite a Senate inquiry - and is selling its approval with the conditions imposed on a deed of undertaking that Treasurer Peter Costello described as "probably the most extensive that I have seen from an Australian company".
The deed requires that Qantas remain Australian owned and controlled, with a majority of Australian directors; it must remain based in Australia and keep its maintenance, aircraft housing, catering, flight operations, training and administration in the country; it must remain committed to a five-year, A$10 billion capital investment programme that includes 70 new aircraft, and expand Qantas and budget offshoot JetStar; it must grow and improve regional services; Macquarie Bank must not vote on any matter relating to Sydney airport.
Labor, which could topple Prime Minister John Howard's coalition Government in elections to be held this year, is unlikely to intervene. "To the extent that those conditions in the deed of undertaking are met, we will not oppose the bid," shadow treasurer Wayne Swan said.
How binding the deed will be remains in dispute. Despite Costello's assurances, there are doubts that it is legally enforceable, and critics point out that if APA later sells Qantas, or its holding slips below 25 per cent, the deed no longer applies.
Cynicism has been further fuelled by reductions in rural services. Asked if this bodes ill for improved regional operations, Trade Minister Warren Truss told reporters: "Clearly they're not going to run services where they're uneconomic."
Unions are also concerned that jobs will be exported, possibly through the creation of new offshoots not covered by the deed. The Australian Council of Trade Unions has rejected assurances on job losses because the Government's Qantas Sale Act does not stop the airline's owners from transferring resources, licences and other assets and operations to a new entity.
The Australian Services Union caustically told the Senate inquiry that similar assurances were made when Air New Zealand bought the now-defunct Ansett, but jobs still went overseas.
For its part, Qantas is worried that demands in a private member's bill that its subsidiaries' catering and maintenance operations be based in Australia could hammer its expansion. It has warned that such a move could force it to sell its wholly owned New Zealand subsidiary Jetconnect, its 46.3 per cent interest in Fiji's national airline and - far more significantly - its 45 per cent interest in OrangeStar, which runs the cut-price airlines JetStar Asia and Valuair. JetStar is central to ambitions to push into Asia.
Qantas is also negotiating to buy 29 per cent of Pacific Airlines, Vietnam's second-biggest airline.
Elsewhere, there are concerns for the level of debt that will come with an APA takeover, and for the biggest commercial cloud of all - competition. An armada of new rivals is winging into Australia and muscling in on some of Qantas' most profitable routes.
Virgin Blue is rapidly expanding within Australia on major routes and in the business and corporate market. It is reportedly planning a new, even more cut-price offshoot to compete with JetStar and a new budget entry, Tiger Airways. Singapore Airlines-backed Tiger, already flying from Singapore to Darwin and Perth, plans an initial fleet of five aircraft to compete on Australian domestic routes.
Virgin is also spending A$2.6 billion on seven Boeing 300ER airliners - with an option for six more - to fly 10 times a week to the US, biting into one of Qantas' key profit-making international routes.
Air Canada is planning to fly US-Australia, with other potential entrants including American carriers such as Hawaiian Airlines and Continental.
The Government has also recently approved an expansion of Emirates flights into Australia from 49 to 84 a week over the next four years, allowed Dubai-based Etihad 28 flights a week by 2010, and increased landing rights for Qatar Airways. Cut-price AirAsia X also intends entering the market.
The battle for Qantas has been joined, on all fronts.
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Who's buying flying roo?
Airline Partners Australia (APA) is a consortium of Australian, US and Canadian investors, some with considerable interests in aviation, formed to bid for Qantas late last year.
They are: Macquarie Bank, involved in aircraft leasing and airport management, notably a majority holding in Sydney Airport; Allco Finance Group, an Australian international finance services group with holdings in an aviation leasing company; the associated Allco Investment Partners investment group, Texas Pacific Group, a US private investment firm that has held significant stakes in Continental, America West and Ryanair, and Onex Partners, a Canadian private equity firm whose aviation holdings include a majority stake in aircraft parts manufacturer Spirit AeroSystems Inc.
The consortium's structure reflects Australian foreign investment rules, which require 51 per cent Australian ownership and no more than 25 per cent to be held by any one foreign partner.
The Allco groups and Macquarie Bank hold 50 per cent of APA, Texas Pacific and Onex 37.5 per cent, other foreign investors 11.5 per cent, and Qantas management 1 per cent.
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The Offer
* Airline Partners Australia is offering A$5.45 a share.
* The bid values Qantas at A$11.1 billion.
* The offer was accepted by the airline on December 14 last year.
* Ninety per cent of shareholders must accept the deal for it to go ahead.
* About 30 per cent of shareholders have accepted so far.
* Shareholders now have until April 20 to take up the offer.
