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Qantas Accepts Sweetened US$8.7 Billion Takeover Offer

Dora Cheok

Qantas Airways has accepted an A$11.1 billion ($8.7 billion) revised buyout offer led by Macquarie Bank and private equity firm Texas Pacific Group, in Australia's biggest takeover and the world's largest airline acquisition to date. 

Just a day before, Qantas rejected a slightly less generous bid from the same group.

In interview with CNBC Asia's "Market Watch", Qantas's Chief Executive Officer Geoff Dixon said that Qantas has long been an undervalued company compared to other international airlines given its performance.

"I think the people that have given us the money to invest billions in aircraft and have enabled us to grow the company and provide jobs deserve to get their day. And they got it today.", said Mr. Dixon.

The sweetened bid raises the buyout price by 10 Australian cents to A$5.60 per share. It also drops a demand for a break-up fee. The offer is 10% above Qantas's last trade and will be unanimously endorsed by the Qantas board, subject to receiving an opinion by independent expert Grant Samuel.

Qantas shares closed up 19 Australian cents or 3.7% higher at A$5.28 Thursday, but remained below the offer price, suggesting that investors were not holding out for a better bid.  The offer price is 29% higher than Qantas's share price before the airline said on Nov. 22 that it had been approached with a buyout offer.

The bid values Qantas at 15.9 times forecast earnings, compared with regional rivals Singapore Airlines trading at 12.9 and Cathay Pacific Airways at 17.8, according to Reuters data.

Qantas started out as a government-owned enterprise, later becoming a publicly listed company on the Australian Stock Exchange.  And if this offer is approved by 90% of Qantas shareholders, the airline will make the transition into a private company. 

The bidding team has been shaped to meet ownership caps on Australia's flag carrier, which require the airline to remain majority Australian-owned, with no individual shareholder owning more than 25%.

The consortium, Airline Partners Australia, includes Allco Equity Partners with a 35% stake, Allco Finance Group with 11%, Macquarie with less than 15% and Canadian investment firm Onex and Texas Pacific with a total of less than 40%.

Qantas management will hold a 1% stake, with Geoff Dixon remaining as chief executive for at least the next three years.

Airline Partners Australia's spokesman, Bob Mansfield, looking to reassure politicians and unions, said the new owners would not break up Qantas, send its maintenance operations offshore nor cut regional routes.

Mr. Dixon said there were no plans for asset sales built into the financial assumptions for the deal, but Qantas would continue to look at spinning off businesses like its catering arm.

Is his CNBC interview, Mr. Dixon added that, "This (Qantas) is now more Australian-owned than it was before.  It has 60% Australian ownership -- 35% of which is a company that's listed on the Australian Stock Exchange (Allco Equity Partners).". 

Allco Equity Partners said that if the bid went ahead, it would seek to raise between A$682 million, to part fund its share of the acquisition, which would see it become Qantas's largest

Texas Pacific stands out among private equity firms in that it has a history of investing in the airline industry. It rescued Continental Airlines from bankruptcy in 1993 and has held stakes in the former America West and Ireland's Ryanair.

Qantas chairman Margaret Jackson and Mr. Dixon, known for their close ties to the conservative coalition government, are expected to lead the effort to persuade Canberra that the deal is in the national interest.

There is some sentiment against this buyout.  During a separate interview on "Market Watch" Barnaby Joyce, the national senator for Queensland state said that as a private company, Qantas could make "other changes towards foreign ownership without ever consulting the Australian people.".

The Australian government has only once before blocked a takeover on national interest grounds, stopping Royal Dutch Shell buying Woodside Petroleum on fears that Shell would develop offshore projects ahead of Woodside's local gas projects.

This consortium will have to win over the U.S. and European arms of U.S. fund manager Capital Group, which together own 12.7% of Qantas, as the bid is conditional on securing 90% acceptance.

UBS advised Qantas on the deal, while Macquarie advised the consortium.