There’s a great scene in the movie adaptation of Barbarians at the Gate where Jonathan Pryce (as Henry Kravis of KKR) hears about RJR Nabisco CEO, Ross Johnson, and Shearson Lehman’s low-ball bid for Nabisco. Furious at being double-crossed by Johnson, Kravis exclaims that Johnson is “trying to steal the company”.
The same comment is being bandied around in relation to APA’s $5.45 ‘final’ offer for Qantas.
While the bid was pitched at a 33% premium to what Qantas had been trading at, since the bid was made, there has been a significant re-rating of global airline stocks.
Further, it seems pretty clear that even without the change in sentiment to airlines, the market had been seriously undervaluing Qantas in the years prior to the bid. Part of the reason for the undervaluation seems to be due to Qantas management actively talking down its own prospects.
- August 2004 – Qantas issues media release entitled “Qantas faces significant challenges”, noting that despite a strong profit result, the airline industry is “still far from stable, with crude oil prices at record highs and annual global traffic numbers below those for 2000.”
- February 2005 – Qantas announces a half year profit of $458.1 million (up 28.1%) but claims that “the international market remained extremely competitive and substantial capacity increases [are] being accompanied by heavy discounting.”
- August 2005 – Qantas announces record profit of $1.027 billion but claims that “the extraordinary cost of fuel will have a substantial impact on the company…we do not expect to achieve the same levels of profitability in the current financial year.” Dixon also claimed that new challenges were appearing “driven by three factors outside [Qantas’] control – the extraordinary cost of fuel, escalating security charges and increasingly intense competition.”
- February 2006 – While announcing an underlying increase in profit of 23.3%, Qantas claimed that “the extraordinary cost of fuel will have a substantial impact on the company…we do not expect to achieve the same levels of profitability in the current financial year.”
It was largely understood that reason for Qantas’ bearish comments was to portray a sombre picture regarding Qantas future viability to counter wage claims by Qantas powerful unions.
However, it appears that the trend is continuing – with Qantas recently announcing that profit full year profit will be up 30 or 40%, but followed with a flood of warnings regarding the potential threats from Tiger Airways, high oil prices and possible price fixing allegations.
While Qantas management’s sombre forecasting traditionally benefited shareholders (by ensuring wages are kept in check) – management’s current negativity is certainly not in shareholders’ interests. Rather, the more negative management are about Qantas’ prospects, the better APA’s offer looks and the less money Qantas shareholders will receive for their shares.
Makes you wonder exactly who Qantas management are currently working for.