Qantas forecast raises pressure on buy-out

Qantas, Australia’s dominant airline, on Thursday endorsed expectations of continued strong profit growth, a move likely to fuel further debate on its pending takeover by a consortium of private equity groups.

The A$11.1bn offer from the consortium, which includes Macquarie, Texas Pacific Group and Allco Finance Group, has been accepted by the airline’s board and approved by regulators, but would be blocked if more than 10 per cent of shareholders express opposition ahead of an April 3 deadline.

Institutions holding roughly 10 per cent of Qantas’s shares have given indications they may spurn the buyout offer as too cheap based on the airline’s profit momentum and they had put pressure on management to provide more earnings guidance.

Improved passenger traffic and falling fuel costs had led the airline to raise its forecast for the year ending June 30 three times between October and February.

Earlier this week, Qantas said it saw no reason to provide another earnings update, but the airline said Thursday it agreed with analysts who on average are forecasting pre-tax profits of about A$1.23bn for the year ending June 30, 2008. For the current fiscal year, Qantas now expects profit growth to be ”towards the upper end” of the 30 to 40 per cent range it forecast last month. Qantas earned A$671m last year.

The buy-out consortium has insisted it will not improve its offer. Qantas shares rebounded 8 cents to A$5.12 on Thursday after falling earlier this week to a three-month low amid concerns over whether the takeover could succeed.

”What we’ve got is a real standoff and the market is really polarised over whether this is a fair offer,” said Ivor Ries, director of industrial research at Baillieu Stockbroking in Melbourne. ”We are probably going to get a lot more posturing over the coming month, but my gut feeling is that the offer will be accepted at the end of the day.’’

The stand off over Qantas comes amid heightened institutional shareholder activism in Australia. On Thursday, shareholders of Rebel Sport, a retail chain controlled by tycoon Gerry Harvey, narrowly voted in favour of a A$369m takeover by Archer Capital, a buy-out firm over opposition from some institutional investors. The proposal gathered the support of 76.7 per cent of voted shares, just over the required 75 per cent threshold. A A$1.6bn management buyout proposal at travel agency Flight Centre fell short of required 75 per cent support two weeks ago.

Qantas noted Thursday that its earnings forecast did not take into account the impact of increased competition or possible liabilities from an investigation into alleged air cargo price-fixing. Tiger Airways, a low-cost airline partly owned by Singapore Airlines, on Thursday received approval from the Australian Foreign Investment Review Board to set up a unit to offer domestic flights in the country.

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