May 08, 2007

With ASIC in the mix, the Qantas players might dance to a new tune

THE $11 billion question now is not whether the Airline Partners Australia consortium may make a new offer for Qantas Airways but whether it must do so.

Specifically, has APA's twice asserted statement that it is considering making a new offer for Qantas triggered an obligation under section 631 of the Corporations Act to make such a bid within the next two months?

ASIC's long-standing practice note on "announcing and withdrawing" takeover bids would suggest that the regulator considers the answer to that question is a resounding "yes" - it's difficult to construe the regulator's stated views in any other way.

Section 631 says it's an offence if a party publicly proposes to make a takeover and does not make the offer within two of making that announcement. It's a criminal offence, which for an individual can attract a fine of up to $11,000 or up to two years gaol, or both. For a company the maximum fine is $550,000.

Section 631 is designed to prevent manipulation of the market by parties acquiring shares in a target, then announcing a fake bid which pushes up the price and enables them to sell at a profit.

ASIC's view is that section 631 forbids a bidder from announcing an offer "unless it has taken adequate measures to ensure that sufficient funds will be available and that the bid can otherwise be made in accordance with the public announcement". ASIC says it will consider prosecuting any bidder which should have known it might not have been able to provide the consideration.

It also warns that it may take enforcement action if it appears that the law has been breached in relation to an announced bid.

APA has twice stated it is considering a new offer - and both times at strategically important times - before Qantas was about to come off a trading halt.

On Monday morning, after the Takeovers Panel and ASIC had both refused requests to extend the initial offer for a further two weeks, APA said that because a majority of Qantas holders (both by number an value) had lodged acceptances, the consortium was exploring a number of alternative "including the possibility of making a renewed offer at $5.45 a share". That of course is the same price as the failed bid.

That statement was made just before 10 am and at that time trading was to resume in Qantas shares at 11 am. But around the same time the panel revealed that APA had suggested that it may in fact have obtained acceptances for more than 50 per cent by last Friday's 7pm bid deadline and the offer may therefore have been automatically extended for a further two weeks. The basis for that argument is that the Qantas bid was for all of each target shareholding - that is, holders couldn't accept for part of their stake; if they did they were legally deemed to have irrevocably accepted for all of their shares. APA considered that some hedge funds had accepted for only some of their holdings and if their entire holdings were included the consortium would have at least 60 per cent of Qantas.

(Three hedge funds, Heyman Fund, Polygon Capital and Highbridge held 20 per cent of Qantas and indicated they intended to accept for sufficient shares to get APA over 50 per cent, but Heyman didn't do so)

ASIC stepped in and required a trading halt pending clarification of the issue raised by APA. Qantas reluctantly did so and requested a halt until the commencement of trading yesterday.

However, at around 9am yesterday APA called off the bid, despite having spoken to certain shareholders who acknowledged their acceptances should extend to their entire holdings and if that applied at Friday's bid close APA would have had more than 50 per cent of the capital. But APA admitted the legal interpretation wasn't clear and that, given the time it could take to litigate the issue and the uncertainty for Qantas and its shareholders, the consortium would not purse the argument and the offer should "treated as having lapsed".

To put the matter beyond doubt ASIC modified the law to ensure the offer had closed as of last Friday. The modification said "for the avoidance of doubt the bidder's voting power in the target is taken not to have increased to more than 50 per cent in the last 7 days of the offer period for the takeover bid".

APA repeated that because a majority of Qantas shareholders supported the bid it was still exploring a number of alternatives, including the possibility of a new bid, but this time made no mention of an offer price.

However, its earlier reference to a renewed offer price of $5.45 would lend weight to the view that APA has made statements that ASIC would consider had triggered a section 631 requirement to proceed with an offer.

After APA ran up the white flag, trading was resumed in Qantas shares. Almost 165 million shares - or 8 per cent of the capital - were traded, with the share price closing down 16c, or 3 per cent, at $5.22, after sales down to $5.13.

That's not a rout, and is much less than many had predicted. But it's also undoubtedly the case that the current share is also underpinned by speculation that APA will return with a new bid - understandably, as APA itself has flagged that possibility.

If APA is considering a new offer then according to ASIC's practice note it shouldn't have said anything until it had taken reasonable steps to ascertain that its financiers would again make the funds available. Of course, it's by no means certain that the Qantas board would now recommend a renewed offer of $5.45 a share. It looked a very generous price at the time, but since the market has risen sharply and Qantas has announced three profit upgrades. Moreover, it's that much closer to a federal election and it must be wondered whether this time around the Federal Treasurer, Peter Costello wouldn't about-face and refuse foreign investment approval.

Intuitively, it would seem to have been in APA's interest to have said nothing about considering a new bid at this stage. The likely result would have been a steeper fall in the Qantas share price, and that may have made shareholders more amenable to a renewed offer price.

But it could also have led to hedge funds selling out, rather than wait to see if there were further developments. And the likely buyers would be local institutions which might be less inclined to accept a new bid.

If APA does bid again, the members of the consortium may be concerned at the risk of further reputational damage if they were associated with an offer that failed a second time, and that would be a real risk at $5.45 a share.

Any new offer may have to be sufficiently above $5.45 to ensure that it would succeed - but of course, that's what APA, and the Qantas board, had been offered in the first instance.

ASIC may have misgivings that an offer above $5.45 would breach APA's earlier commitment that it was the consortium's final price. But that commitment was to a bid which is now closed and it must be wondered whether ASIC would be prepared to take action to prevent Qantas shareholders form receiving a higher offer.

It won't surprise if, after APA weighs everything up, APA decides it's all too hard and that it won't bid again. If that happens it would put the acid on ASIC to decide whether it would seek to require a new bid.

By Bryan Frith. Contact:

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