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SYDNEY - Private equity firms and Australian directors should avoid taking on excessive amounts of debt to either complete a buyout or to protect a company from being a takeover target, Treasurer Peter Costello said.
"It is incumbent on company directors, it is incumbent on buyers to make sure they don't get into trouble, to watch their gearing levels," Costello said in Sydney yesterday. "If you borrow too much against the value of a company you can get into trouble."
Qantas, Australia's largest airline has agreed to a sweetened A$11.1 billion ($12.55 billion) buyout from a group including Macquarie Bank, Texas Pacific and Allco Equity Partners. The group will sell 90 per cent of the debt it needs to fund the purchase in the European and US markets, three bankers involved in the deal said last week.
Costello joins Reserve Bank of Australia Governor Glenn Stevens and the chief executives of National Australia Bank and Westpac in cautioning about higher levels of corporate debt linked to increased deals by private equity firms.
The exposure of the financial system to higher levels of debt "could be rather more prominent as an issue over the next five years or so than it has been for a couple of decades," Stevens said last week.
Offers by buyout firms have soared to a record A$33.4 billion in Australia this year, from A$1.9 billion for all of 2005, according to data compiled by Bloomberg. Buyout firms use a combination of their own funds and debt to pay for acquisitions.
They seek to expand those companies or improve performance before typically selling them within five years through stock offerings.
The Qantas deal is being scrutinised by the competition regulator and the Foreign Investment Review Board. The Treasurer has the power to block takeovers deemed to be against the national interest.
- BLOOMBERG
