Sydney view: What price a struggling little airline?

In the rarefied world of corporate finance, the role of the independent expert in a takeover battle is to give impartial advice to the board and shareholders on the value of the company's shares.

Usually, they err on the high side. It gives the target company something to defend, and the aggressor room to manoeuvre without being seen to short-change its own shareholders. Everyone can be a winner.

Once in a while, an independent expert arrives at an assessment that ascribes fair value at the bottom end or even beneath the offer price. It can cause confusion all round.

Such is the case with Hazelton Airlines, the struggling regional carrier that has become the plat du jour for Qantas and Air New Zealand and the forum for a fascinating display of machismo between new chief executives Geoff Dixon and Gary Toomey, the upstart Impulse Airlines and the Australian Competition and Consumer Commission.

Impulse, which has dared to attack the established duopoly on several key trunk routes, set the ball rolling in the middle of last year when it proposed a merger that was accepted in principle by the Hazelton board.

Air New Zealand, which hosts Hazelton at its Ansett terminal in Sydney and had an option over a 20 per cent stake, lobbed the next shot by offering 90c a share.

The independent expert Ernst & Young thought that was quite enough and put a share value of 60c to 90c on the company.

The Hazelton board was not so sure, suspecting that its valuable landing rights at Sydney Airport could be worth a lot more to either Ansett or Qantas, and set about creating a bidding war between the two giants of the domestic market.

And how they succeeded. Ansett and Qantas have trumped each other and are standing at $A1.60 and $A1.50, respectively, leaving the fair value of Ernst & Young trailing in irrelevance.

The appeal of Hazelton is not immediately obvious. More often than not it makes a loss, and those in the industry say there is little reason to be attracted to the airline except that it has the largest share of regional landing rights at Sydney Airport.

It is not even clear that the board moves in one direction.

While Max Hazelton supported the Ansett bid and committed himself to selling his stake to them, company chairman Stan Quinlivan has pledged his stake to the lower Qantas bid.

The decisions reflect their respective loyalties, but it may be that neither agreement will be upheld.

On Thursday, just as Ansett and Qantas were preparing to descend on Canberra and present their arguments to the feisty ACCC, the Federal Government intervened to protect the interests of the powerful rural lobby, which has agitated to keep regional services at the centrally located Sydney Airport rather than at Bankstown.

Deputy Prime Minister and Transport Minister John Anderson ruled last week that the landing rights held by Hazelton for its regional services could not be simply transferred to interstate services outside a one-hour window. That effectively removes a lot of the attraction.

Ansett, having come so far, says it remains committed to the bid and is motivated by a desire to expand its regional services and establish a presence in New South Wales.

At least it has the opportunity of extracting significant cost savings from the purchase.

But if the ACCC does intervene - more talks are scheduled for this week - Ansett will not lose if Impulse has its way.

The problem for Impulse, however, will be in the pricing. Ernst & Young says fair value is around 60c to 90c. Hazelton shareholders have already got used to the idea that they will get at least $A1.50 a share.

* Giles Parkinson is editor of AFR.com