Take-off or crash landing?

Shares in Australian airline Qantas are, appropriately enough, in the ascendant. Yesterday, they hit a seven-year peak amid expectation that a consortium including foreign private equity names such as Texas Pacific and Onex Corp is poised to submit an offer for the company in the region of A$11 billion ($8.7 billion). The stakes are high. A failed bid would have the potential to send not only Qantas’ shares, but also the entire Australian LBO market, into something of a tailspin.

Until this year, Australia had no LBO market to speak of. Even relatively modest A$1 billion-plus deals were almost as rare a sighting as a penguin on Bondi beach. In recent months, however, the country has witnessed an attempted (and ultimately unsuccessful) A$18 billion takeover of retailer Coles Myer by KKR and the completion of two multi-billion dollar publishing deals by KKR and CVC (Seven television network and Publishing and Broadcasting Ltd respectively).

There is little doubt that Australia is on the radar of private equity’s big hitters. Says a Sydney-based gatekeeper: “Global funds are cashed up and, for the first time, looking for assets on a truly global basis. When they look at Australia, they see assets that are well managed, a stable economic and political environment and the ability to bring deep sector knowledge from elsewhere and apply it there.”

The question is not whether global buyout funds are ready for Australia but whether Australia is ready for global buyout funds. The same gatekeeper describes the Qantas bid as a “test case” in terms of how receptive Australia will be towards foreign private equity takeovers. After all, Qantas is viewed as a national icon and Australia’s airline sector is governed by tight ownership rules. The bid has already generated some heated debate. In a less than subtle reference to Texas Pacific, an airline industry spokesperson railed: “American equity people might think we are stupid but we are not.”

Probably of more concern to the bidders than such emotional outbursts will be the steely eyed glare of the regulator. The Financial Times recently reported that the consortium, which also includes Macquarie Bank and various Australian institutional investors, is keen to ensure that at least 51 percent of Qantas remains in domestic hands. Meanwhile, the foreign investors in the group are reportedly keeping their equity stakes to less than the 15 percent each that would potentially trigger an investigation by the Foreign Investment Review Board.

This sensitivity to the ownership rules is what makes Qantas the “test case” referred to earlier. Says the gatekeeper: “If the consortium meets the requirements of all parties – sellers, regulators, politicians etc – there’s no reason why it shouldn’t succeed. If they meet the legal requirements and then there’s intervention, it’s would surprise people. It’s not the sort of market where you would expect that to happen. But there again, we’re entering new territory here.”