There’s an extraordinary amount of comment going nowhere about the possible takeover bid for Qantas – while the stock market is saying it doesn’t quite believe it.

When the market believes a bid is on, the price generally rises very close to the expected offer, if not beyond it when an auction is possible. After Wednesday’s initial enthusiasm about a reported $5.20 offer, Qantas shares dropped back to $4.93 yesterday and they’re not doing much this morning either.

The meaningless statements by various politicians (eg Oz, Smage) haven’t helped, but the main problem has been finding the value in the deal. As the AFR puts it:

The incredulity shown by market analysts to the proposed Macquarie bid for Qantas underlines why private equity has prospered, because it has shown the public market has undervalued some companies. This said, the airline industry is notoriously volatile. Qantas is far from lowly geared at 47%, with an interest cover of 5.7 times, and once aircraft leases are included in the equation, a fully priced takeover isn’t a walk in the park.

Consider also the value of a deal if interest rates continued to rise next year, Qantas had a mid-air calamity and oil prices skyrocketed. As expected, Canberra has some misgivings about the deal even if on paper it doesn’t have a leg to stand on if the bidders comply with conditions laid down in the Qantas Sale Act.

The political problem arises because Qantas is a national symbol, one that has received strong support from Canberra in protecting its local duopoly and its key international routes. Heading into an election year, politicians don’t like surprises. For Canberra to block a deal that complies with the law would show breathtaking hypocrisy from a Liberal Party government and be contrary to every principle it is supposed to support.

No, the upside isn’t terribly obvious on any front. If the current Qantas management has been sitting on billions of dollars in hidden value, it should be sacked instead of gifted 1 per cent of the airline. And, to restate Crikey’s initial instinct, it’s hard to see continuing political protection of Qantas on the Pacific route if it’s just to the benefit of Macquarie Bank and Texas Pacific and the detriment of consumers and the wider economy.

Meanwhile, as an example of the broader world, Jacques Chirac and Romano Prodi are discussing the possible merger of Alitalia with Air France-KLM. There are indeed major rationalisations looming in aviation – maybe that’s what’s on Texas Pacific’s radar.

Peter Fray

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