Wednesday, February 28, 2007

A Few Grumbles

Firstly there is the news that our Prime Minister has been chatting with Liberal party heavy weight, Ron Walker about Nuclear Power. Nothing wrong with that you say, free country, etc. etc.
We were led to believe at the time the prime minister announced an enquiry into nuclear power that it was part of an open discussion about alternative energy. Now we find out that Mr Walker had registered a company specifically for the purpose of building?, operating? a nuclear power station. This was done around the time the prime minister was talking up the prospect of nuclear power as a future power supply. Come clean the pair of you and tell us about the chicken and the egg.

Water: Heard from someone today that they take 7 minute showers every day of the week, they need the 7 minutes cause they have to wash their hair every day. I grew up in a family of four kids we had a bath once a week and we shared the water. Here in Victoria we are experiencing a severe drought that has been going for 7 years. We are encouraged to save water, people tell you how they save their shower water, to water precious plants in the garden. We even know how many mega litres it takes to produce our breakfast in the morning. We have been encouraged to dob in a Water Wally. But what we do in the confines of our home is kept a secret. I threaten my family with the water police, which isn't a river boat but a police officer with a big wrench to turn your water off, if you are wasteful. So beware. And to give said friend a break the length of shower has come down from 7 mins to 5 since stage three water restriction have come into force.

Lastly; some politicians just don't know when to stop. Well most don't, but some just keep going far too long. There is one in Western Australia he used to be their premier. Lost his job, got into trouble with the law, served his time, out again and now many years later he has resurfaced as a powerful maverick behind the scenes of the Labor party. I think to date 3 or 4 high ranking members of the West Australian parliament have been sacked, for associating with him. And what are they doing? Silly stuff like fund raising, helping each other, doing favours. The sort of thing that can lead to corruption if it is not kept transparent. You know the sort of stuff school boys do, but sometimes they continue to do when they are old enough to know better.


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Wednesday, February 21, 2007

Merchant Banks

As readers of this blog will know I have been banging on about the sale of Qantas airlines over the last few weeks. One of the major sponsors of this sale are the Merchant banks and one in particular.
The other day I heard a senior executive of this bank being interviewed and of course the topic of his pay came up. He is paid millions of dollars in bonuses and fees. All based on his performances. His base pay is a cool $400,000.00 [that is four hundred thousand dollars] which he described as well below world average for his job. But in reality his take home pay is millions of dollars.

He kept using the word 'Create' to describe what he does, as in.

"When I create I should be paid large sums of money, because I create." What I think he meant is, he is creative with making money make more money.

From what I can see from a deal like the tunnel that goes under Sydney, [which has been a disaster of a project]. The likes of his bank took enormous amounts of money in the form of fees. Sometimes, in fact many times, banks like his tout their creative ideas to governments with the hope of picking up very large projects.

My feelings on this sort of behaviour is not that it is creative, more predatory than creative. This takes me to the Qantas deal and the behaviour of this bank. It thinks it is being creative to buy up a company of this size and then play with the figures and make it look profitable so the new owners can sell it in a few years for a profit.

This may sound simplistic but when you see the figures that these banks and directors are going to pay themselves, the only motivation must be to make very large amounts of money. A figure of $80 million in fees.

If the share holders weren't the only interested group that need to be consulted on this sort of predatory behaviour then these deals would have a much harder time getting approved. And this still may be the case with regard to the Qantas deal. Due to regulatory controls.

If the main way of measuring success in this world is by how much money you can extract from any given deal, then Merchant banks are a business success. But as with the Sydney Tunnel and the Qantas deal, there will be numerous other factors in play.

What is the purpose of building roads that need the protection of other roads being closed and hefty tolls being imposed to make them profitable for elite investors. When our environment is being harmed by too many cars.

Equally what is the purpose of buying an airline and burdening it with debt [which includes large amounts of unperformed debt to pay Bank Fees] to buy fleets of planes to carry more passengers and compete with low cost competitors. At a time when fuel consumption and the environment has rightly become a real concern.

I believe this type of predatory banking/financing is cleaning up the later part of the capitalist system as we know it. There will be a melt down of money markets and this way of doing business will be seen for what it is, a rich mans play ground in the guise of responsible wealth creation. And then see where our Super Annuation funded wealth disappears too.


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Thursday, February 15, 2007

More on QANTAS

Here is a follow up piece from Kenneth Davidson in The Age Newspaper re. the sale of Qantas. It is worth a read cause it will most definitely relate to a company in your neck of the woods too.
PS I have been told by one of my readers that she prefers my more personal tales. I will endeavour to find one around here soon.

THERE are five reasons why Treasurer Peter Costello should block the sale of Qantas to private equity consortium Airline Partners Australia (APA).

The sale is at the expense of Australians both as taxpayers and superannuants. It increases the risk that Qantas will go bankrupt.

And even if APA achieves its objectives, the takeover will not generate wealth and will add to Australia's already onerous

net foreign debt of about $550 billion.

But more importantly, if this deal goes ahead, it will be the forerunner to a flood of similarly financially structured takeovers that will load Australian corporations with debt levels not seen since the '80s, which led to the "recession (Australia had) to have".

If this deal goes ahead, any company, no matter how large and well managed with a prudent debt-to-equity ratio, will be vulnerable to takeover by privateers who will finance their takeover by loading the target company with debt.

In the '80s the main actors were the paper entrepreneurs — the Bonds, the Holmes a Courts, the Spalvins and the Abe Goldbergs.

The immediate victims were the banks, which lived in a world of unlimited financial liquidity thanks to financial deregulation, were desperate to lend to anybody, and ended up with $28 billion of what were laughingly called non-performing loans.

Compared with today — with trillions of dollars sloshing around desperately looking for profit — the '80s was a period of financial drought.

Today the paper entrepreneurs have been replaced by a new breed of financial engineers who specialise in private equity.

The banks still play a major role in putting the deals together, but instead of risking their depositors' funds, the deals (and the risks) are passed on to superannuation funds.

It helps to understand what is going on by knowing why APA can pay a 25 per cent premium on the value of the pre-bid shares, which adds

$2 billion to the Qantas market valuation.

APA would like you to believe that by going private, the entity will have more freedom to restructure and take a longer-term view than that available to management of a publicly listed company subject to the discipline of investors and regulations designed to protect investors. Maybe.

The name of the game is leverage — the same game that was played out in the '80s. APA will finance its highly leveraged bid by accessing the $330 million-a-year corporate taxes paid by the company now to finance the extra interest on borrowings and use the assets (mainly planes) as surety for the loans.

The takeover proposal reduces equity in Qantas from $6 billion to $3.6 billion. Debt is increased from $5 billion to $8-9 billion.

For a given revenue, the smaller the equity, the higher the return to equity holders; but the higher the debt, the higher the fixed costs and the greater the risks.

The transaction and success fees that will be extracted from Qantas if the takeover goes ahead are staggering — in the order of $400-500 million — for what amounts to low-grade activity that adds nothing to Qantas' value.

The participants expect another similar round of transaction fees when Qantas is sold back to the public in five years, provided the company's value rises sufficiently.

Whether the value rises during this period depends far more on the economic environment continuing to be favourable to civil aviation in general (low interest rates and global growth) and Qantas in particular (the regulatory regime that continues to exclude Singapore Airlines from profitable routes) rather than the superior management skills of the new, temporary owners, who have said they intend to keep the present management and corporate strategy in place.

According to a report in The Age last December of a speech by Reserve Bank governor Glenn Stevens, private equity companies claim they have more room to restructure, "but mainly their strategy is one of leverage", adding that, if the process continued, corporate debt could be a bigger risk to the economic and financial system than it has been for 20 years.

According to the Reserve Bank statement on monetary policy, issued this week, leveraged buy-outs (LBOs) rose from an average of $1.5 billion a year over the previous five years to $7 billion last year. In the last December quarter alone, the value of completed or pending LBOs was $19 billion.

The RBA commented: "If the current surge in LBO activity continues for some time, the increase in corporate leverage could become a long-term risk to economic management."

In the absence of a reversal in the scandalous decision to abolish capital gains tax on capital gains realised by foreigners, and the absence of changes to the corporations regulations to make private companies subject to the same rules of disclosure as public company, the only way to prevent the surge of LBOs becoming a flood is for the Treasurer to stop the Qantas takeover and any others of the same ilk in the pipeline.

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Tuesday, February 13, 2007

Qantas I'm Worried

I have been very worried by the events around the take over of Qantas. By taking the company off the share market, loading it with debt and predicating the future profits on expansion of the fleet. Larger aeroplanes at a time when we are all becoming worried by climate change and green house gases being a major contributor. The future needs to be carefully managed if we are to protect our planet. Rampant capitalism isn't the way, the era of conservative politics where the market decides what we consume must be brought under control. It is one of the most destructive forces on this planet.


A journalist who writes for The Age newspaper here in Melbourne [Kenneth Davidson] has written an article looking at this take over. I have copied it below. Or you can visit the page here.

THE Qantas Bidder's Statement released last week is pure flannel designed to reassure the public that the airline will remain Australian owned and operated in the national interest.

Remember the reasons given for the privatisation of Qantas in 1995 was that market discipline would create a leaner, more efficient, more profitable (hence higher tax-paying) entity that would generate a win-win situation for the public, the shareholders and passengers.

Now we are expected to believe that this same market is myopic, investors are so obsessed with short-term profit and the share price that management is prevented from taking the "tough" decisions needed for long-term benefits.

This is a nice argument, but it is inconsistent with the facts. The only instability in the register until the takeover offer was when British Airways sold its 18 per cent stake in 2004. Shareholders have taken up rights issues to finance expansion with alacrity.

The value of the Airline Partners Australia (APA) bid is 25 per cent higher than the pre-bid price, which adds $2 billion to the Qantas market valuation.

This suggests that either the market undervalued the company by this amount or that the bidders have overvalued the company by this amount or some mixture of the two.

The letter to shareholders states: "APA is committed to supporting Qantas' current senior management team in achieving their existing strategy. Importantly, this includes supporting a $10 billion capital investment program over the next five years. More than 70 new planes will be introduced by 2014 to increase capacity by around 40 per cent."

And yet in the trade magazine Airline Business (July 6, 2006) David Bonderman, the founder of Texas Pacific Group, the largest foreign equity holder in the takeover vehicle and the investment vehicle that helped revive or launch carriers such as Continental Airlines, American West, Ryanair and Tiger Airways told the annual meeting of the International Air Transport Association it was time to sell airline stocks because "this is as good as it gets in the airline industry and it is only going to get worse".

Airline Business quoted Bonderman as believing "the industry is probably at its peak. It has been the same phenomena every six-eight years since the Wright Brothers. The massive aircraft orders that Airbus and Boeing booked last year is the almost perfect predictor to the top of the cycle. In two years' time you are going to see everyone cancelling those airplanes," Bonderman said.

He is entitled to change his mind or lie to convince the market that he is in the market to sell airline assets when he is in the business of buying. It is the duty of Qantas board members to be informed of these matters as custodians of the company with responsibilities to inform shareholders fully.

As shareholders and the public are given to believe that Macquarie Bank put this deal together, the real (or imagined) difference in the market and the APA valuation of the company Qantas is mainly based on APA's ability to "extract" value from the enterprise that is not now available to shareholders.

Macquarie Bank is Australia's financial engineers par excellence. Anthony Munk, managing director of Canadian company Onex, which is committed to take 12.5 per cent of the equity in APA, was quoted in Toronto's The Globe and Mail on December 13 after the offer was announced, justifying the investment thus:

"This is a very good company, it is well run, its market is well protected, we think that it really has a quality service to offer on its international routes and we just feel that there is an opportunity to extract value."

Munk has to be reasonably honest because he is talking to his investors. Bob Mansfield is different. His job is to reassure politicians and the public that the takeover is temporary and in the public interest.

The question is how will value be extracted. In the absence of candour from the bidders we can only guess: apart from cutting labour costs (easy with WorkChoices) the techniques are likely to involve asset stripping, combined with splitting the airline into profit centres based on high-value, high-cost local (City Flyer and regional) and international (North America, Johannesburg, Tokyo and Jet Star taking over the less profitable) routes.

The claim in the Bidder's Statement that foreigners will be stumping up 49 per cent of the equity but will accept only 39 per cent of the voting interest is irrelevant window dressing designed to reassure the natives. The equity partners will be looking after their own interests, which may or may not coincide with the national and public interest.

The $10 billion borrowings are to to be funded by a consortium of six foreign banks led by Morgan Stanley. According to Euromoney: "Credit Suisse was one of the banks originally touted as a lead, but the bank dropped out due to the leveraged loan's lack of usual covenants." In crude terms, the bid will be financed by high-risk, high-interest, junk bonds. Security for the loans will be the company's assets.

The hinge on which the whole deal rests is Qantas directors' willingness to ditch their policy of limiting debt to 50-60 per cent of assets in favour of a policy accepting an increase in debt to about 80 per cent of assets with provision to go even higher if economic conditions are unfavourable.

Qantas profit will be wiped out by the additional debt, but so will the tax liability, which will be redirected to financing the debt. APA wants tax-free capital gains, not taxable income. With luck, taxpayers will be paying for the cost of the $10 billion addition to our international debt necessary to finance the takeover.

Don't expect to hear much about this from the ALP. Its new business adviser, Sir Rod Eddington, is a director of Allco Equity Partners, a partner in the APA bid.

The ALP voted with the Government in December to abolish capital gains tax on assets held by foreigners. This has added $200-$300 million to the value of the Qantas takeover offer to the 47 per cent of foreign shareholders who will sell their shares. And it will add hundreds of millions to the after-tax gains of the foreign equity partners when they sell out of the tax avoidance scheme in a few years, providing all goes well.

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Thursday, February 08, 2007

Elections and Climate Change

It seems like only a year or so ago that we were being congratulated on good GDP with low inflation and a growing economy. Business as usual for the majority of the population. The greed of the 1980s-90s had been replaced with the Avarice of the new millennium. We were all acquiring new things, from houses to cars, ipods, computers, overseas trips, etc etc.

Now all of a sudden, at least over here in Australia, where we have two more elections [state and federal] We are starting to debate in earnest the difficult subjects of: Climate Change, Water, Renewable energy.

It is difficult for us cause we all use these things and really most of us haven't stopped to think, what it is doing to our environment and just how sustainable it all is.

This is the crux of the matter, we have rarely, if ever had to rein in our excesses even in war time, we sacrificed our personal use but continued to use our resources at increased rates.

No we have got where we have not by being careful users of our resources. We have expanded and reproduced like rabbits on the back of insatiable and unsustainable demands.

The really hard thing for the current crop of politicians is to understand that the reasons they gave for electing them last time, are in many ways, the opposite to what we want them to do this time.
The left wing Greens are to have their day. If politics is what I think it is, then a compromise will have to be met, and I don't think the world has time for compromise we have wasted too many years living on the hock.


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Monday, February 05, 2007

Oil and Water Wars

We are at the start of what will be remembered in a hundred years from now as the century that brought to a head the Oil and Water resources wars. At the moment we are dressing up the first one [Oil] in all sorts of other disguises. The Americans as usual are waging an outright lie of a war. Calling it some sort of holy war or vendetta but in reality a thinly disguised insurgence to gain control of at least some of the middle east oil. As usual it is a mess and wont be solved in the short term.

The Russians do it a different way and trump up charges against their new found entrepreneurs and lock them up, and I assume then take back control by government decree the oil assets they previously owned.
Here in Australia we argue with the poorest newest nation [East Timor] about there relatively small oil reserve shared with us off their coast line. And so on around the world.

Water wise we have a takeover bid by the federal government to take control of the rivers of South East Australia. We have abundant water in the north and not enough in the South where most of us live. Who gets the water, will be fought over [politically] during this century.

Elsewhere in the world the fight is on for control, distribution and quality of water. Elections will be won and lost over these issues. But more importantly so will wars.

I haven't even mentioned Asia or South America they want to enjoy the living standards we have taken for granted for a century now we are asking them to bypass the good times and taken on the pain as we expect to do, without even a sniff at the good time excesses we have enjoyed in the West. Don't expect an easy ride on that quest either.

For the first time in a very long time our children will have a materially lower standard of living than we have. This is going to hurt. No wonder the investment bankers around the world are looking at acquiring publicly listed assets, such as Utilities and Transport. They can take the financial guts out of them before they become hollow edifices.

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