HONG KONG/SYDNEY Australia's Qantas Airways Ltd (QAN.AX) has seen its share of suitors knocking on the company's cabin doors before, and with the stock trading at record lows, now may seem to be a good time to welcome a white knight.
However, a nasty dispute with unions and limits on foreign ownership are outweighing the airline's cheap valuation, keeping potential strategic partners and private-equity bidders at bay. And these issues are not likely to be resolved anytime soon.
Qantas returned to the air on Monday after grounding its entire global fleet over the weekend in a bold tactic to force the government to intervene in the nation's worst labor dispute in a decade.
Four years ago, Qantas narrowly missed being bought by a private-equity consortium in a $11 billion deal. A year after that, it held merger talks with British Airways, but they collapsed over differences over valuations.
"I doubt there are vultures circling over Qantas for a takeover as the airline can't show it is able to overcome what could potentially be a destructive confrontation between management and unions in the coming weeks and months," said Shukor Yusof, a Singapore-based analyst for Standard & Poor's.
"There are many problems ahead and that's putting off any potential suitor," he said.
'NEVER SAY NEVER'
Shares in Qantas, the world's 15th biggest airline by market value, have lost 71 percent since a TPG Capital TPG.UL and Macquarie Group (MQG.AX) consortium attempted a bold takeover at the height of credit boom in 2007.
Qantas' 12-month forward price-to-earnings ratio has dropped to 6.8, which is 70 percent lower than its all-time high in 2009. The slide also makes Qantas the third cheapest airline stock among the world's top 19 airlines by market value, according to Starmine Estimates.
Anxious shareholders are hoping the management will end the two-year drought of dividends or be scooped up by a suitor. But foreign ownership rules are among the hurdles.
Foreign ownership in Qantas is capped at 49 percent under the Qantas Sale Act and a single foreign owner can only own up to 25 percent. Foreign airlines are barred from owning more than 35 percent of Qantas.
"In this environment, I think it's unlikely for any private equity venture to find the debt to take it on," said Sydney-based Naz Ressas, a portfolio manager at Colonial First State's growth fund, a Qantas shareholder.
"You never say never, but until we get more confidence and access to debt, I don't see it occurring," he added, a sentiment echoed by several other analysts. Colonial owns just over 5 percent of Qantas.
Foreign ownership in Qantas stood at 39.1 percent at end November, 2010.
The share price collapse is a reflection of the tough operating environment for the airline industry. What Qantas needs is to cut costs by keeping wages under check and shifting maintenance work offshore, but the workers union is opposed to both.
SCOPE FOR RETURNS
The hurdles to takeover have not stopped traders from betting on a likely acquisition of the airline and just two months ago, the company played down media speculation of a private-equity bid after the stock slumped to a near-record low in August.
While the debt markets are difficult, private equity funds in Asia have an estimated $70 billion in so-called dry powder that can be used to fund any takeover.
Tough debt market means buyout funds will have to use more equity to back a deal now, which will reduce their returns.
Buyout funds can extract returns by stripping assets and selling them. Qantas' Frequent Flyer business and freight-handling business have previously been mentioned as profitable business that can be sold.
Frequent Flyer for instance is forecast to make A$216 million ($232 million) in earnings before interest and taxes (EBIT) next year, according to UBS, accounting for more than a third of Qantas' EBIT.
While Qantas' debt has grown to about A$7.2 billion, its debt-to-equity ratio of 0.89 is the seventh lowest among the 19 top airlines.
All these factors are favorable for any takeover to occur and hence there is room for buyout funds to load up debt to take Qantas private and still earn juicy returns.
But the question is whether any buyout shops have the appetite to takeover a national carrier and fight with unruly unions.
"It's pretty hard to consummate a takeover," Sydney-based RBS analyst Mark Williams said, citing the ownership restrictions.
"Private-equity taking over airlines is not usual business anyway. Given that there was an attempt made and it didn't eventuate, I would be surprised if that occurs again," he added.
($1 = 0.933 Australian dollars)