May 06, 2007

Now to test the Qantas price

Airline Partners Australia's dire warnings that Qantas's share price would slump if its $11.1 billion takeover bid failed finally will be put to the test during the next few weeks.

Despite Qantas reporting its best ever traffic figures and issuing three profit upgrades since its board was approached by the Macquarie Bank consortium, APA continued to warn in the dying days of the bid that Qantas's shares could fall back towards their $4.20 pre-bid price.

Only last week APA again seized on a three-month-old statement made by independent expert Grant Samuel, which warned the share price was "likely to fall back towards the pre-bid price of around $4.20" if the deal failed.

The expert, however, added Qantas's share price could trade higher "given the earnings upgrade and the reductions in fuel price".

Since November Qantas has issued three profit upgrades, the most recent one in March. And there is speculation it could be poised to again upgrade its earnings following recent strong passenger numbers. But there remain mixed views whether Qantas shares will hold above $5, particularly in the short term as foreign hedge funds are forced, by law, to sell their stock.

Deutsche Bank last month warned the share price would fall to $4.70 if the takeover collapsed.

JP Morgan last week held on to its $5.68 target price for Qantas, citing the high yields and passenger loads being enjoyed by the airline.

This week Qantas will release its monthly traffic figures which could fuel the upbeat profit outlook for the airline which has been helped by the rising dollar in recent weeks.

Most of Qantas's major competitors have enjoyed strong gains in their market valuations, outstripping the takeover premium offered by APA, since the consortium launched its bid.

APA offered a 30 per cent premium on Qantas's share price. But since the takeover was launched late last year, Air New Zealand shares have doubled and Virgin Blue shares have risen by about 50 per cent.

When the takeover collapsed on Friday, APA appeared to have shifted in spruiking the value of its bid.

Originally, it compared its premium to share prices in the immediate lead-up to the takeover. But over the weekend, it trawled further back in history to include the time when the airline was ravaged by higher oil prices.

"The APA proposal offers an attractive 60 per cent premium above the three-year average price of Qantas shares prior to speculation about the offer," it noted in a statement yesterday.

Virgin Blue has so far held up despite APA's repeated warnings about the effect of the entry of Tiger Airways into the domestic market. The warnings also of the effect of increased competition from Middle Eastern airlines such as Etihad, Emirates and Qatar have been tempered by other airlines announcing their withdrawal from Australia, such as Austrian and Gulf Air.

The Australian Shareholders' Association meanwhile called on the Federal Government to remove the 49 per cent foreign ownership cap on Qantas. ASA deputy chairman Stephen Matthews said the cap has acted as a restraint on Qantas's share price.

"If the Government can allow Macquarie Bank and their cronies to buy this airline for financially engineering a profit out of it, what is wrong with allowing foreign shareholders to have an increased interest," he said.

Source: The Sydney Morning Herald

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