BA eyes Qantas, Iberia tie-ups

BRITISH Airways CEO Willie Walsh isn’t short on ambition. On December 3, Walsh confirmed he was simultaneously negotiating mergers with fellow OneWorld alliance members Australia’s Qantas and Spain’s Iberia while still pursuing a joint venture with yet another OneWorld carrier, American Airlines.

For BA, such a tieup would give it an unrivaled global footprint and improved financial clout, and analysts estimate total cost savings could reach $875 million. Iberia would bring $3 billion in cash and a 20% share of the Europe-Latin America market. BA already has a long-standing revenue-sharing arrangement on flights between Britain and Australia with Qantas, and there is little overlap on existing routes. Together with Qantas, BA would carry 71 million passengers a year on 474 aircraft flying to more than 230 destinations. To get around current rules limiting foreign ownership of Australian airlines, the companies would remain as separate legal entities, with dual listings in Australia and Britain and a single board structure.

GOING GLOBAL

BA and American Airlines are applying for regulatory clearance to cooperate more closely over fares, schedules, and other operational issues in the lucrative transatlantic market. Back in August, American Airlines, BA, and Iberia signed an agreement to cooperate commercially on flights between North America and Europe. They applied for antitrust immunity, noting that their agreement would allow the OneWorld alliance to compete more effectively with rival networks SkyTeam and Star Alliance.

If Walsh succeeds, the combination of the four airlines—three controlled by BA—would create the world’s first truly global carrier, says Doug McVitie, founder of aviation consultancy Arran Aerospace in Dinan, France. “The creation of this kind of super-alliance is the way of the future.”

Tell that to Iberia CEO Fernando Contes. For the past five months, merger discussions between Iberia and BA have stalled over disagreements on the share price exchange ratio and concerns over BA’s large pension deficit. Contes, who was informed of BA’s bid for Qantas only an hour before the British carrier notified the stock market, told aviation executives at a lunch in London on Dec. 3 that it was “more rational” for his company’s merger with BA to precede a deal with Qantas and that pursuing both deals “would be too complex.”

TIME IS RIPE

Walsh’s move is indeed both audacious and complex. There has never been a truly global airline merger before, given that governments worldwide have been loath to cede control of carriers to foreign rivals. And regulators have scuppered previous attempts at tie-ups over competition concerns. But many analysts believe times have changed. “Now is a time of opportunity as aviation shares have fallen dramatically,” says Peter Morris, chief economist at aviation consultancy Ascend Aviation in London. “It’s about buying into future cash flow at a reasonable price.”

Witness the spate of deals recently announced as Europe’s strongest carriers rush to consolidate to cope with weakening demand. On December 1, Europe’s biggest discount airline, Ryanair kicked off the action, launching an all-cash $950 million bid for rival Irish carrier Aer Lingus, in which it already owns a nearly 30% stake. And on Dec. 3, the same day BA confirmed its merger talks with Qantas, Deutsche Lufthansa announced plans to take over Austrian Airlines by acquiring the Austrian government’s 42% stake for a nominal fee of — 0.01 per share and paying around $476 million for the remaining shares. “What we are seeing is a polarization of the industry around the big European carriers,” says McVitie. While the economic logic is compelling, political obstacles remain. Still, analysts reckon the sheer force of the global economic downturn is likely to help overcome them. Already there are signs that some governments and regulators are more open to consolidation. –

British Airways targets Qantas merger

A MOOTED $8 billion Qantas merger with British Airways would be structured to ensure compliance with the Qantas Sale Act, but any deal could be jeopardised by BA choosing to merge first with Spanish airline Iberia.


Federal Transport Minister Anthony Albanese said yesterday that Qantas had to remain Australian-owned for national security reasons.

He cited bilateral aviation agreements -- for example, the arrangement with Japan restricting landing rights to a "51 per cent Australian-based airline" -- as well as the importance of a national carrier during emergencies, such as last week's shutdown of Bangkok's international airport.

"There are national security issues, particularly for an island continent located on the globe where Australia is, for having a national airline," Mr Albanese told the ABC Television's Inside Business program.

The minister noted, as well, that he had been able to pick up the telephone last week and ask Qantas chief executive Alan Joyce for extra flights out of Thailand.

It is understood, however, that any Qantas-BA deal would involve a dual-listed company structure that would comply with the act, which requires Qantas to be based here and have two-thirds of its board seats occupied by Australians, including the chairman's position.

Qantas has yet to start lobbying the Government about the transaction, preferring to wait until the proposed merger terms are finalised, which is unlikely before Christmas.

Share market trading over the past 12 months suggests Qantas would be the senior merger partner by a ratio of 55:45.

The airline's recent 2009 profit downgrade to about $500 million has, however, narrowed the gap to 52:48.

Mr Joyce and his BA counterpart Willie Walsh met in Hong Kong midway through last week.

Instead of making headway with the merger, they spent most of their time responding to an early leak of their merger plans to the media.

Both parties have done due diligence but the process has not been completed, although $US500 million ($771 million) in synergy benefits have been identified. One source said the major unresolved issues were the airlines' relative values, a pound stg. 2 billion ($4.5 billion) deficit in the pound stg. 16 billion BA pension scheme and BA's outlook given its heavy exposure to a downturn in trans-Atlantic flying because of the global financial crisis.

On the upside for BA, the performance of its new Terminal 5 at London's Heathrow Airport had been "encouraging", the source said.

The structure of the deal is understood to be fairly well advanced, and will approximate that of BHP Billiton-DLC.

In the current dislocation of debt markets, both parties are keen to avoid any trigger for a refinancing.

A potential spanner in the works, though, is the fate of BA's scrip merger discussions with Iberia. Last July, the airlines said their boards "unanimously" supported the talks.

In an embarrassing revelation, Iberia chief executive Fernando Conte said last week he had not known that BA had been conducting parallel negotiations with Qantas.

Qantas sources said the involvement of Iberia did not necessarily kill a Qantas-BA deal.

The Spanish airline, though, could only be introduced to a three-way merger after a Qantas-BA deal took off first.

The reason was that a BA-Iberia deal would be a full merger, including board seats for Iberia directors.

A merger of that entity with Qantas would make it hard to comply with the Qantas Sale Act and its board requirements.

HCL RIVALS INFY’S AXON BID

INDIA’S largest tech acquisition bid just got bigger. HCL Technologies, the country’s fifth-largest tech firm, on Friday announced a counter-offer to acquire UKbased SAP consultancy Axon Group for about £441.1 million ($810.8 million) or 650 pence a share. This is an 8.3% premium over Infosys’ 600 pence-ashare bid for Axon announced on August 25.

Responding to HCL’s counter-offer, Infosys in a statement said, “Infosys is considering its position and urges Axon shareholders to take no action at this time. A further announcement will be made in due course.” Infosys’ offer was the largest ever tech acquisition bid by an Indian company so far.

What is it about Axon that has India’s leading IT firms slugging it out with each other?

“We chose Axon because it’s the only pure-play, large SAP consultancy firm in the world. It offers scale and size and has high-end consulting services,” HCL Technologies CEO Vineet Nayar said.

Analysts and investment bankers in the know feel that it is very likely that Infosys would make a counter offer, as HCL’s bid is higher only by about 8.3%. It’s understood that Infosys had factored in the possibility of a 15-20% hike in its offer price. The Bangalore-based IT firm is likely to sweeten the offer with the revised price anywhere between 670-710 pence per share.

HCL has signed an inducement contract with the Axon board on Friday that entitles it to get 1% of the bid amount if it failed to acquire the consultancy. It hopes to close the deal in the first quarter of calendar-year 2009. The timeline, however, does not take into account a counter offer to its own bid. Under the UK takeover laws, a counter bid to HCL’s bid would have to be made within the next 45 days.

“The fact that the Axon board has signed the inducement contract shows that they welcome our offer,” Mr Nayar said. HCL said it identified Axon as an acquisition target in the first quarter of this year and started discussions with the company in July. Merrill Lynch and Standard Chartered are the financial advisors to HCL for the bid. HCL Technologies said it will fund its bid for Axon largely through debt. Mr Nayar said the company already had £400 million worth of debt commitment from Standard Chartered. It also has about $570 million cash in its balance sheet.
£ 407m INFOSYS BID (AUG 25) £ 441m HCL’s COUNTER-BID (SEP 26) £ 29.5m AXON NET PROFIT (2007) £ 204.5m AXON REVENUES (2007) Buyout makes sense for HCL

Analysts said the acquisition would make strategic sense for HCL but stretch its balance sheet. “Axon has good capabilities and it makes sense for HCL whose ERP implementation capabilities are limited compared to its peers,” said Angel Broking analyst Harit Shah.

At the time of going to print, the Axon scrip was trading 6.94% up at 678 pence per share, following the announcement of the counter-offer. For the year-ended December 31, 2007, Axon reported profit before taxation of £29.5 million on revenues of £204.5 million. The 2,000 employee-strong Axon provides process consultancy services to large organisations that have chosen SAP as their strategic enterprise platform. It counts British Petroleum, Cable & Wireless, Xerox and Kraft among its clients. It gets about 61% of its revenue from Europe, Middle East and Asia. For Indian companies looking to diversify and reduce dependence on the US, which is reeling under the financial crisis, Axon’s geographic presence is also a big draw. Infosys, however, kept its cards close to its chest, not immediately revealing if it would pick up the gauntlet thrown down by. When contacted, Infosys CEO S Gopalakrishnan said: “We will look into this and decide.”

The Axon acquisition tale may take more twists as other potential suitors are seen showing interest. ET had reported earlier this month that Japanese majors Fujitsu and NTTSoft may enter the fray, too. Further, there is the possibility of some European IT majors and PE players wooing Axon. It is being speculated that Capgemini may make counter-bid. While there is no official comment from Infosys because its is in its silent period ahead of the announcement of its second-quarter results, sources at top levels in the company said the possibility of a counter-bid had been factored in and that it was reviewing the situation.

Industry observers say Infosys’ bid may succeed because of the irrevocable undertaking it has from the Axon management team, which holds an 18.1% stake.