QAN deal fails

The buyout consortium, Airline Partners Australia (APA), failed to keep the Qantas deal alive as they were unable to get 50% acceptances from shareholders by last Friday. Now remember the bid was for $5.45 per share an approximately 35% premium to the pre-bid price of around $4.00. Yes the company is experiencing excellent trading conditions and is on track to post record earnings this year and next. However even bearing that in mind I struggle to justify the pre-bid price of $4.00 with fair value at around $3.77 per share.

The valuation below assumes QAN can continue to provide a ROE at the historically high 16.7% rate forecast in FY08 - a big assumption given their fairly average returns of around 13-14% over the past 5 years. If you're wondering why ROE doesn't show more improvement over the forecast period that's because on average over the last 4 years QAN has raised $200m of new capital each year. A discount rate of 16% reflects QAN's high debt levels. Taking debt into account return on funds employed is a mediocre 12.7%.


This is a low return, highly geared, highly capital intensive business operating in an industry with poor economics. Despite favorable market conditions QAN does not present an attractive investment opportunity at pre-bid prices of $4.00. Even if you don't agree with the above valuation would you reject a 35% return on your money today as opposed to the chance of a 35%+ return in the future in such a poor returning business? Richard Branson was once asked, "How do you become a millionaire?" He replied:

"Start off as a billionaire and then buy an airline"