Yesterday, news of Qantas (the Aussie national icon) being stalked by private equity electrified the Aussie market. At one point, fuelled by rumours that a takeover deal could be worth up to $5.50, Qantas shares shot up to a high of $5.25.
We are simply amazed at the audacity of private equity nowadays. It seems that no public companies are safe from these marauding hordes. Do they want to take over Qantas just to prove that they can?
As we said before in Qantas rose on takeover rumour, there are substantial legal and political challenge for the takeover deal to succeed. To even contemplate such an endeavour, the share price of Qantas (before the release of the news) would have to be at such compellingly discounted level that the private equity can still offer a higher price that is economical. We doubt it is so for Qantas. We cannot understand what value these private equity see in Qantas at such an exorbitant price. Why would they even want to bother to borrow so much money (note: debt increase the risks further) to go through so much trouble and risks for so little? We scratch our heads in wonder. Perhaps these deals are structured to benefit the CEO, directors and fee-chargers (read: Macquarie Bank) much more than shareholders and investors? If the deal succeeds, we can imagine Qantas being slashed, burned and plundered mercilessly in order for this daring adventure to be worthwhile for the pirates.
It looks to us that this year?s rise of the private equity phenomena could be an indication that the world is still sloshing with too much liquidity (money and credit). Private equity siphon up a lot of debt and its easy availability may lead to situations where lenders underestimated the risks. As this article said,
WESTPAC’S David Morgan last week urged caution about the torrent of private equity deals, saying the inflated asset values, highly geared takeovers and rising interests rates paralleled the boom and bust conditions of the 1980s. What is unclear about the debt-fuelled private equity bubble, however, is who will be left wearing the losses when it ends.
Indeed, financial regulators around the world are getting concerned. As this article mentioned,
THE collapse of a large buyout firm was “inevitable” and could threaten the stability of the British economy, Britain’s main financial watchdog has warned as it becomes the latest international regulator to focus on the private equity industry.
As investors, we take heed of this phenomenon as a warning.
