The Smage’s Stephen Bartholomeusz stated on Saturday that Federal treasurer, Peter Costello, could “orchestrate a higher bid for Qantas”. In an article that might as well have been ghostwritten by the Qantas board, Bartho claimed that removing the foreign ownership limit (of 49%) would “add value, in [Qantas’s] current, independent form”.

Bartho argued that:

Without the ceiling on foreign ownership, it would be reasonable to expect that Qantas’ share price would be higher than it would be with the cap in place. Indeed, it is feasible that if the demand from foreign investors for Qantas shares were allowed to be fully satisfied, its “normal” trading price — without a takeover premium — today would be close to, or even within, the $5-plus a share range that the Macquarie consortium is considering.

Not sure what Warren Buffett would think of all that given that he regularly tells shareholders that to value a business “what counts… is intrinsic value – the figure indicating what… businesses are rationally worth. With perfect foresight, this number can be calculated by taking all future cash flows of a business – in and out – and discounting them at prevailing interest rates.”

Using Buffett’s reasoning, whether Qantas has a foreign ownership limit of 49% or 0% should not affect its future cash flows and therefore, should have no bearing on Qantas’s intrinsic value. Sure, removing the foreign ownership cap may cause Qantas shares to spike slightly due to the presence of a takeover premium, but in the long term, it should not affect the cash flows received by shareholders and by implication, the value of the company.

Perhaps the reasons why Qantas shares have generally underperformed the market in recent years include the default risk of the airline industry in general (the majority of airlines either bleed money or go bankrupt), the risks to revenue due to external shocks (such as terrorism, disease or fuel prices) or the fact that the majority of Qantas profit comes from a government allowed duopoly on the Pacific route.

Many successful companies have no takeover premium. Buffett’s own Berkshire Hathaway, Murdoch’s News Corp and Lowy’s Westfield have regularly delivered superior returns to shareholders despite there not being any “takeover premium” built into their share price.

The lack of a takeover premium is not an excuse that management can rely on for generating lacklustre shareholder returns. If Qantas management are able to consistently provide superior returns and generate positive returns for shareholders, the share price will follow – removing the foreign ownership limit for the sake of a short term share price boost would be the financial equivalent of negotiating with terrorists.

Peter Fray

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