The all-out assault on Virgin Australia launched by Qantas’ chief Alan Joyce this week has won some unintended support from the Australian Shareholders’ Association, which is rushing to the Takeovers Panel today to stop a $350 million non-renounceable capital-raising already underway. Both claim Virgin’s capital-raising amounts to a foreign takeover by stealth, because it is sub-underwritten by Etihad Airways, Singapore Airlines and Air New Zealand, which together own 63% of the airline and stand to lift their holding to as much as 68% if small investors choose not to take up their shares, as usual, when the retail component of the raising opens on Monday.
The ASA has never gone to the panel before, so the case breaks new ground. The application will be made by 5pm today in the name of the ASA’s Stephen Mayne, making good on a threat he issued at Virgin’s annual meeting in Brisbane yesterday. Mayne demanded Virgin remove a 40% cap on so-called “over-subscriptions” by small investors by 10am this morning. The cap limits the amount of extra stock shareholders can take up from any shortfall left in the placement, and is likely to cause the small shareholders as a class to be diluted on the Virgin share register. Virgin declined the ASA’s request this morning, announcing it would stick to the existing structure.
Control is a genuine issue here because, while they already own a majority of Virgin, the foreign airlines stand to get three new seats on the board between them as part of the deal, with the total number of directors set to jump from seven to at least 10. Virgin says the board will still be chaired by a majority of independents, although there will only be five independents: chairman Neil Chatfield and non-executive directors David Baxby, Sam Mostyn, Mark Vaile and Robert Thomas. Virgin said today it would vary the number of board seats up or down if necessary to maintain the majority of independents.
At Virgin’s annual meeting yesterday Mayne challenged the independence of Baxby, who formerly worked for and represented Richard Branson’s Virgin Group — which holds 10% of Virgin Australia — on the board. He was not described as independent in the notice of meeting, but Chatfield said that was an “error”. Baxby denied he had spoken recently with Branson about the company although he maintained a dialogue.
The ASA and Mayne have been campaigning to ensure company boards treat big and small shareholders equally when raising capital, ever since the GFC, when Australia’s top listed companies rushed to make emergency share placements to big institutional investors to pay down debt. They want raising to be renounceable, so if they decide not to take up their shares, small shareholders can sell their entitlement via a bookbuild.
Mayne’s argument has nothing to do with Qantas’ self-interested campaign. Joyce blasted Virgin’s capital-raising on Monday and launched a “Fair Go 4 Qantas” campaign urging its 30,000 employees to lobby politicians, following up with a round of meetings in Canberra yesterday asking for the foreign ownership restrictions on Qantas to be lifted. He got short shrift.
Mayne’s concern is for the rights of Virgin’s minority shareholders; Joyce wants a level playing field on foreign ownership with his major competitor. Qantas argues it is put at a competitive disadvantage by restrictions on foreign ownership — capped at 49% under the Qantas Sale Act — although it is hard to see how. There is no evidence Australian institutions have been reluctant to invest in Qantas, or that the airline’s cost of capital is higher as a result of the limit. The limit is effectively self-monitored anyway and hardly enforced; when hedge funds were jockeying for position on the Qantas register during the failed privatisation bid in 2007, foreign ownership was reported to have hit 60%.
Amid all the grandstanding — with threats of litigation flying back and forth, including defamation and anti-dumping action — there is a genuine issue about the Virgin raising.
Proxy adviser Ownership Matters principal Dean Paatsch this morning described the structure of the Virgin raising as “ingenious”: whether or not the major airlines sub-underwriting it are acting in concert, they wind up being paid a fee to take up cheap shares they already wanted anyway. It may be pure coincidence, he says, and it will be hard to prove otherwise. The three airlines are all competitors and, outside Virgin, are out there cutting each other’s throats.
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The takeovers panel must decide by tomorrow whether it will hear the ASA’s application.