Qantas Float a Success

It is thought that this might have explained why there was a falloff to $2.15 towards the end of the day, as foreign buyers realised that they were getting very close to the Federal Government’s 49% limit for foreign ownership. Indeed, as day two opened, there was speculation that Qantas had already breached the 49% limit for foreign ownership, resulting in some nervousness that some buyers might have to divest a portion of their stock. This uncertainty caused the price to fall to $2.03 during the morning’s trading, although by the end of the day it had returned to the first day’s closing price of $2.15. It did actually reach a peak of 53.18% before the trimdown process began. In hindsight, it could easily be said that the result had “met expectations”, that it was a “satisfactory outcome.” It was, however, in many ways quite an extraordinary result considering the rough ride the float had had during the run up to August 1.

Sentiment was by no means positive earlier on in the year, and there was no shortage of advice that Qantas was too risky, its profits too volatile, its costs were too high, and that there were altogether much more sensible investments around. In the May budget the Government, fearful that the domestic market could not muster sufficient support, increased the foreign ownership limit from 35% to 49%. Since British Airways already owned 25% of the company, this left only 24%, or 240 million shares up for grabs on the foreign market (and even this was scaled back to 200 million during the prefloat share allocation).

A potentially significant setback came in June, when several US investment banks withdrew from the float. Further bad news followed in July, when the four Australian co-lead managers to the issue withdrew from marketing the shares in the USA. Some were asking questions about the ethical issues involved in the Government enticing large numbers of naive, first time investors into the ownership of highly volatile, risky airline shares by effectively appealing to their emotions, rather than common sense and hard financial judgement.

The prospectus itself, for those who read it carefully, made clear the risks involved in airline investments in general, and Qantas in particular. It described how airline passenger yields have been declining annually by about 2% in real terms since 1970 and made clear the political risks involved in the airline industry (p29). It clearly indicated the volatility of airline earnings (p30). It also mentioned a few more worrying items, such as the unrealised foreign exchange losses of $750 million that the airline was carrying (in the small print at the bottom of p48).

Nevertheless, in the weeks leading up to the float, sentiment appeared to have gradually improved from cautiously pessimistic to generally positive. This was in large part to the success of the Qantas “roadshows” to overseas investors – a generally sophisticated lot who appeared to fully appreciate the volatility of the airline business. For these people, in many cases managing overseas funds valued at many billions of dollars, the risk of holding Qantas shares could be diversified away across the many other stocks they held, and the risks were therefore judged to be acceptable. Their situation was therefore very different to the Australian “mums and dads”, for whom Qantas might have been the only stock they held, and who would have been mightily displeased if the price had gone down instead of up on day one.

The other unexpected boost for Qantas came in the form of a couple of good weeks’ performance by the Australian stock market, which had generally failed to impress for much of the year but seemed to come good at exactly the right time as it followed the lead set by the USA. When the deadline expired, the float had been oversubscribed, i.e. people wanted more shares than were available – a good sign for the float on Monday July 31 1995. On the weekend prior to the float, the Federal Minister for Finance, Kim Beazley, announced that the price of shares was to be set at $2.00 for institutional investors, and at $1.90 for private investors. This was above the floor price of $1.80, but not quite as good as it could have been, with the upper end of the possible price range having been at $2.10. Although the price was towards the upper end of market expectations as they stood at the time of the announcement, the consensus was that the Government had positioned Qantas quite well for the float, and had managed to resist being too greedy in trying to rake in the maximum amount of cash it could possibly manage.

One final, last minute hurdle for Qantas came in the form of an attack by former chairman Jim Leslie in the Weekend Australian on July 29, who complained at the highly favourable treatment given to British Airways which was revealed in the prospectus. The provisions included giving BA three seats on the board, not subject to election every three years, and the right of veto over the appointment of Qantas’ chairman. These provisions, he said, made “Australian shareholders second class citizens.” In the end, however, these objections appear to have counted for nought, and the float, at least after the first few days, could only be described as a complete success.

All in all, the float appears to have produced winners all round. The Government has won, getting the float away successfully and netting a tidy $1.45 billion for its deficit reduction (or will it be election spending?) programme. The institutions have won, and the small time investors who sold out on the first day perhaps did best of all. If there was one group that didn’t have a clear win on the day, it would have to be British Airways, which paid $2.67 per share when it bought its 25% stake in 1993, and was therefore sitting on a loss (on paper at least) of $130 million. Nevertheless, given the degree of effective control over Qantas suggested by Jim Leslie, perhaps BA have in fact done very nicely out of the overall process.

The biggest winner, of course, is Qantas. But for Qantas management this is not the end of the story, but only the beginning. During the coming months, Qantas will be subject to close scrutiny as never before. No doubt this will concentrate the minds of Qantas management, as they adjust to life in the full glare of the spotlight of the world’s financial markets. Paul Couvret is a consultant of the PA Consulting Group, an international management and technology consultancy.