Alan Kohler put it best in Saturday’s Smage when he noted that the private equity buyout of Qantas isn’t so much a takeover, instead (like all LBOs), it is more of a “refinancing”. No one is taking over anybody; rather, the Qantas buyout involves replacing $8 billion of equity with $8 billion of debt while management stays pretty much the same.

The beauty of the deal from the private equity viewpoint is, despite Peter Costello’s rhetoric, the fact that the Government will always provide a virtual guarantee for Qantas. An International Air Law lecturer once told me that the first thing any country does, no matter how small it is, is create and operate an airline. He was right. Even tiny countries like Aruba, Bhutan, Burkina Faso, Djibouti, Micronesia and Reunion all proudly boast national airlines. Without a national carrier, a country is irrelevant.

The situation is even more pronounced in a developed, large and isolated country whose tourism sector (which provides 5.6% of Australia’s employment) is virtually dependant on Qantas for its survival. Qantas’s value to Australia is far greater than its enterprise value of $18 billion.

The Australian government could not and would not let Qantas fail. The PE consortium and the banks providing the bulk of the debt would be well aware of this fact.

Peter Costello is therefore placed in a very unenviable position. Wave through the bid and the government is on the hook if oil prices skyrocket or an act of terrorism occurs. Block the bid and be accused of xenophobia and over-protectionism.

The PE consortium is effectively buying a very fancy put option on oil prices and the likelihood of a terrorist attack – with the government (through its obligation to maintain a national carrier and generous tax laws), paying the premium for them. All going well, the consortium receives a billion dollar plus payout (plus hundreds of millions of fees). All going badly, the consortium loses a little equity (but still keeps the fees) and the Australian taxpayer picks up the tab.

Helluva deal, that.

Peter Fray

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