Qantas Debt Is Too High, Says Costello

Sydney Morning Herald

Tuesday December 19, 2006

Mark Davis Political correspondent

PETER COSTELLO has warned that investors like the Macquarie Bank-led consortium bidding for Qantas are taking on too much debt, increasing the risks of 1980s-style corporate collapses.

The Treasurer said yesterday there was nothing wrong with so-called private equity deals - where investors use their own funds to take over public companies - if all that was involved was a change in the ownership of companies.

"But the second leg of the deals as we have seen them tends to be after the private owners get control, or as a condition of getting control, they borrow huge amounts which they gear against the company," Mr Costello said on ABC radio. "The gearing ratios are much, much higher than anything that you would normally see on a publicly-listed company. This was a phenomenon that occurred in the late '80s in our country and around the world and we know that it did end in tears."

Mr Costello has the power under foreign investment legislation to block the Qantas takeover if he judges it to be against the national interest.

The Coalition backbencher Bruce Baird called on him to take a "hard look" at the deal.

Mr Baird said voters in his Sydney electorate of Cook, where many Qantas pilots live, were worried. "They are saying, 'Don't let it happen, don't sell out to the corporate raiders', and they are worried about the impact on the 38,000 people who work for Qantas. I have spoken to Peter Costello to convey their concerns and I want him to have a hard look at it in terms of the national interest.

"If the Government is going to sign off on it we need to get some agreement in terms of jobs in Australia, in terms of offshoring, in terms of Qantas continuing as a full service airline, and in terms of conflicts of interest with Macquarie's ownership of Sydney Airport."

Another Coalition backbencher, Geoff Prosser, said the Government should not intervene to block the deal, but it should reconsider its decision earlier this year not to let Singapore Airlines compete with Qantas on the Pacific route between Australia and the US.

Mr Costello said companies with unsustainably high gearing ratios - the amount of debt compared to the amount of shareholders' funds - could get themselves into trouble.

Interest rates were much lower now than in the late 1980s, making debt more affordable. "But other than the change in interest rates, it does not seem to me as if there is all that much difference between what is happening in some of these companies and what happened in the late '80s," he said.

Earlier this month the governor of the Reserve Bank, Glenn Stevens, raised concerns about the amount of debt being used to fund private equity deals.

Recent deals have included Newbridge Capital's purchase of Myer department stores for $1.4 billion, Publishing & Broadcasting Ltd's sale of half the Nine Network to CVC Asia Pacific for $4.5 billion, and Kohlberg Kravis Roberts purchase of half of the Seven Network's television, magazine and internet interests for $3.2 billion.

© 2006 Sydney Morning Herald

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