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Qantas domestic - mopping up the blood

By Jonathan J. Ariel - posted Thursday, 24 May 2007


What a difference a resignation makes.

Last week Qantas Chairman Margaret Jackson promised to disembark at the next AGM. But guess what? Her promise barely registered with shareholders. The share price moved just one cent on the back of her announcement. Her fan club would no doubt have hoped for the share price to fall out of bed, showing how indispensable she is to the airline. Sadly for them, no such luck.

Let's be clear. No seismic shift in the behaviour of the board took place at the meeting of May 17. Stockholders who legitimately seek some sort of contrition from the board for its obscene fawning over the cashed up ATM (Allco, TPG and Macquarie) consortium’s share offer have little to celebrate. Ms Jackson has glued herself to the chairman’s seat for six more months and those board members who decked the corridors of head office in Coward Street, Mascot with boughs of holly (thinking Christmas has come early) are still on the board.

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The board’s loving (and one-eyed) embrace of the ATM offer seemed to personify special-interest politics, and the stench of aviation fuel from the runways at Sydney’s MacAirport dripped from every word the chairman voiced in amorous support of the bid.

A pilot’s licence is not required to solve what went wrong. Most in the press corps were right to question the chairman’s vociferous support for the offer. The chairman, you recall, advised shareholders that if they didn’t think the stock price would tank following a rejection of the bid, then they are “mental”. But these journalists missed the bigger picture, something I mentioned here on March 22. Something that Balance Equity Management’s Mr Andrew Sisson and UBS Global Asset Management’s Mr Paul Fiani clearly didn’t miss. That is, that the real value of Qantas is closer to what a mega-carrier such as a merged United Airlines-Continental would be prepared to pay and not what the private equity piranhas were offering.

The sins of the board can be explained as follows. Imagine your parents pass way, and bequeath to you and your brother (your only sibling), real estate valued at $1 million. How do you know it’s worth $1 million? Well, your brother tells you that a neighbouring property with identical dimensions sold for $1 million only days ago.

Now assume your brother, advises that he has an offer of $1.3 million for the property and urges you to agree with him to sell it, saying that there is no higher offer, and that the price of $1.3 million is unheard of. While these two points are true - there is no higher offer on the table and the $1.3 million is admittedly an unheard of price - his undignified haste in insisting on your signature on the contract for sale, is truly obscene.

He is clearly (1) oblivious to the fact that if another party is offering $1.3 million then surely the property is worth more than $1.3 million, and (2) the true value of a property should be gauged after it is put on the market and every likely buyer is informed of its availability. And that every likely buyer is given time to raise the finance to make a genuine bid. Who knows what the property is worth, if the market is not comprehensively tested?

What the board should have done is state the bleeding obvious: that the $5.45 offer represented a 30 per cent premium to the share price of $4.20 (of November 6) the day before rumours of the offer first circulated, and that the “independent” Grant Samuel report, while useful, should not be the final arbiter of a fair share price. During the period in which Grant Samuel (the investment bank) prepared the “fairness opinion”, the board, to remain independent, could have marshalled its takeover defences; scouted for other bidders; adopted a poison pill; bought or sold off assets; leveraged up its capital structure; or adopted whatever other defensive measure may be effective under the circumstances. That way, even if the board was enamoured of the ATM bid, it could signal that the bid is too low, and that a higher bid would be entertained (favourably) by the board. This would be just the right thing to do, from a shareholders’ perspective.

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Judging from media reports, the board did none of those things. Not one. On the contrary, it rolled over and asked the consortium to tickle its pouch.

The board’s cheering on of the $5.45 offer per share is perplexing to say the least given it is Qantas management and board who claimed over the years that the market had consistently undervalued the worth of the airline. So how can it now say that one bidder out of the blue has got the price right?

The very day Ms Jackson flagged her intention to resign at the next AGM, the ATM consortium advised that they have no further interest in a buy out of the airline. Coincidental? You be the judge.

The board’s fanatic support for the ATM bid raises important questions: did the board engage in due deliberations? Assuming Ms Jackson doesn’t disembark forthwith; will her continued tenure and her strong identification with the bid, conflict with shareholders’ interests in the event that a rival bid is made before her planned resignation at the AGM? How does the flying Monopolistic Marsupial plan to deal with the perception that Ms Jackson is the ATM’s woman on the spot? Was the Grant Samuel report (which said the bid was “fair and reasonable”) nothing more that the board vaccinating itself by obtaining an independent opinion? (Note that such exercises do not provide any reliable guarantee that the transaction will benefit shareholders. Fairness opinions of investment bankers - like government consultants’ reports - often reflect the wishes of those commissioning it.)

Ms Jackson’s continued tenure on the board hangs like a toilet seat around her neck. The sooner she disembarks the more integrity she’ll walk off with. And the sooner the shareholders can flush the collective chain and refill the boardroom cistern with fresh talent.

Ms Jackson’s exit and the two other empty chairs on the board - being Mr Packer’s and another unfilled vacancy - affords the Monopolistic Marsupial a chance to redeem itself.

While there is talk of Mr James Strong (a current director on the board) swapping his seat and becoming chairman, two issues come to mind.

First, former CEOs are forbidden from becoming chairmen. And while some commentators are flagging a repeal of that requirement so as to shoehorn in Mr Strong into the role, I question if shareholders are open to yet more boardroom shenanigans. Somehow I doubt it.

Second, I wonder just how starry-eyed are Qantas shareholders about having an experienced aviation industry veteran in the chairman’s seat as many in the media are. Surely it is enough that a chairman has sufficient boardroom experience. Any absence of technical aviation industry knowledge is not necessarily a liability, given that any future chairman can expect to mine knowledge and advice from the CEO, Mr Geoff Dixon as well as former CEO, Mr James Strong. Both of whom will still be sitting around the board table.

That said Mr Strong would no doubt prove tobe an able deputy chairman.

If one was to look outside the Qantas hangar for a chairman, one external candidate with a wealth professional and academic experience, not to mention a person held in high regard by both corporate Australia and by politicians, readily comes to mind.

At less than 5km - as the forthcoming Boeing 787 Dreamliner flies - from Qantas head office in Mascot lies the University of New South Wales in Kensington. Professor Fred Hilmer is currently at work there as the vice-chancellor. He is also the Deputy-Chairman of Westfield. Previously he was the Chairman of (New South Wales utility) Pacific Power and Deputy Chairman of Foster's Group.

He is no doubt best remembered for his reign from 1998-2005 as CEO of John Fairfax Holdings, and before that he was Dean and Director of the Australian Graduate School of Management. He also ran management consulting firm McKinsey’s Australian offices, he chaired the Business Council of Australia's Employee Relations Study Group and in 1992-1993 he oversaw the National Competition Policy Review Committee.

If not Professor Hilmer, Qantas could look towards federal and state government boards and choose someone from that pool. After all, most government corporations are monopolist or quasi-monopolists, and operate in a customer (and shareholder) derisive manner, so a transition from a government board to Qantas should be a walk in the park for any candidate.

One serious candidate must be Mr Philip Higginson.

Mr Higginson served for more than 12 years as Chairman of TransGrid, the NSW high voltage power transmitter. He was highly regarded by former Premier Bob Carr as well as by his lieutenant, Treasurer Michael Egan, before falling out of favour last November with Egan’s replacement as Treasurer, Mr Michael Costa. Mr Higginson has a wealth of experience as chairman or director in the private, public and NGO sectors. His addition to the board, if not as chairman, then as director would be a positive for the airline.

As for other possible directors, given his intellect, straight talking and demonstrated integrity throughout the entire takeover fiasco, Balance Equity Management’s Mr Andrew Sisson has surely earned a seat on the board. And his 5.3 per cent stock holding must count for something.

Fellow shareholder, UBS Global Asset Management’s Mr Paul Fiani (who has been a touch quiet with his opinions) with his 6 per cent stock of Qantas shares could be reluctant to join the board given his employer’s role as potential advisor to Qantas in any future bid. I mean, having shares in, advising on, and sitting on the board of the airline could give new meaning to conflict of interest.

Mr Sisson’s appointment should be seen as the voice not only of the 11 per cent+ shares of he and UBS control, but rather as the voice of the thousands of mute “mum and dad” shareholders (not to mention large hedge funds) who are united in their belief that they were shafted by the current board.

Oh, and another thing. Smart move having the AGM after the federal election. While Qantas loudly champions AWAs, if the socialists under Mr Rudd happen to win, then the airline has the opportunity to appoint a well connected ALP “mate” to join the board, doesn’t it?

In any event, shareholders must be vigilant that political board appointees (be they conservative or socialist) are not made at the expense of persons with commercial talent.

Case in point: while running over possible candidate names, the former Federal Transport Minister, John Anderson, would surely loom large on the Qantas executive team’s radar. While he sat in Cabinet, the Member for Gwydir (NSW) was so ebullient in his support for Monopolistic Marsupial, that some thought he really was the Member for Qantas and not some rural NSW seat (greater in size than England and Scotland combined) bordering the Sunshine state. Inviting him to the board would send the wrong signal to Qantas shareholders in particular, and to the market in general.

Whereas adding Professor Hilmer, Philip Higginson and Andrew Sisson to the board - sooner rather than later - will do a lot to mop up the bad blood between the current board and Qantas shareholders. And there’s a hell of a lot of mopping up to do.

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About the Author

Jonathan J. Ariel is an economist and financial analyst. He holds a MBA from the Australian Graduate School of Management. He can be contacted at jonathan@chinamail.com.

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