Some pain but a lot more gain

The sharemarket may experience a short-term correction in trading this week but is expected to continue making gains into the longer-term future.
CommSec chief equities economist Craig James said the overall picture was positive.
"Underpinned by an incredibly favourable economic environment, we believe that the current sharemarket rally has further to go," Mr James said.
"That doesn't mean that it is all one-way traffic - it has risen by 200 points in just six days. A correction is looming."
AMP Capital Investors' Dr Shane Oliver sort of agrees.
"Although shares are at risk of a further pull-back in the short term on the back of renewed worries about the US economy, a significant correction is unlikely and the broad trend is likely to remain up," he said.
"Valuations are still not stretched, profit growth remains solid ... the US economy is weak [while] the rest of the world is sound, the prospect of lower interest rates in the US will help support and push price-to-earnings multiples higher, and the flow of funds into both global and Australian shares is likely to remain strong."
Among company earnings to be reported this week are those of Australia's largest investment bank, Macquarie Bank, on Tuesday and takeover target, retailer Coles Group, on Thursday.
There is also a lot of local economic data to come, with figures for housing finance, wages and consumer confidence all expected this week.
The local bourse will have the support of a positive close on Wall Street on Friday, as US stocks rebounded from their steepest fall in two months on Thursday on reassuring inflation news that may give the Federal Reserve room to lower interest rates. The Dow Jones industrial average was up 111.4 points, or 0.84 per cent, at 13,326.5. The Standard & Poor's 500 Index was up 14.37 points at 1,505.84. The Nasdaq Composite was up 27.78 points at 2,561.52.
For the week, the Dow was up 0.47 per cent, S&P 0.2 per cent and Nasdaq down 0.41 per cent.
Dr Oliver said his outlook on the Australian dollar also was positive overall.
"While the Australian dollar is undergoing a correction, it has more upside ahead of it, probably to the February 1989 high of US89.50c," he explained.
"The interest rate differential versus the US is set to widen with the US edging toward a rate cut and the risks are still skewed to the upside for Australian interest rates, commodity prices are likely to remain strong and the normal tendency for currencies to go to extremes all suggest that the trend in the Australian dollar will remain up."
But anyone looking for crude oil prices to ease may be disappointed. "With global demand for oil remaining strong, OPEC successful in restraining global supply and inventories low, crude oil is likely to hold between $US60-$US65 a barrel," Mr James said. "Global supplies are expected to lift late in 2007 but until then, price risks are on the upside."

Santos announces $300m share buyback

Energy giant Santos has announced a off-market share buy-back worth $300 million.
The buyback would improve the efficiency of Santos' capital structure and result in improved earnings per share, managing director John Ellice-Flint said.
The scheme will involve a tender process, where shareholders will be invited to sell their shares at a eight to 14 per cent discount to the market price or final price tender.
The Santos board said the buy-back would not affect the company's capacity to pay fully franked dividends for the foreseeable future.
"This initiative reflects our solid balance sheet and cashflow position, combined with the board's view that the company's shares are being undervalued by the market," Mr Ellice-Flint said.
"Directors considered a number of capital management alternatives and concluded that an off-market buy-back would be the most effective way to deliver additional benefits to shareholders.
"In particular, the buy-back is expected to improve the efficiency of Santos' capital structure and result in improvements to earnings per share and return on equity, which will therefore also benefit non-participating shareholders."
The terms and conditions of the buy-back will mailed to shareholders by June 4, with the tender period opening on June 12.
The tender will close on June 29.
Santos said the buy-back would be funded from existing working capital and debt facilities.
Santos shares closed on Friday at $12.25.

Heads to roll in the wake of Qantas sale fiasco

The bungled $11.1 billion private equity raid on Qantas has left the national carrier exposed to another takeover, given the airline's board has already telegraphed its reserve price.
The Macquarie Bank-led consortium's desperate attempts to resuscitate the failed bid ended in humiliation yesterday when the Federal Government-appointed Takeovers Panel - and the Australian Securities and Investments Commission - killed it.
Shareholders now regard the position of Qantas's chairwoman, Margaret Jackson, and her fellow directors as untenable, given her resounding endorsement of the deal, which some believe undervalued the airline. Government sources say some senior ministers were "very happy" the controversial bid had failed.
It collapsed on Friday night when the private equity suitor, Airline Partners Australia, admitted it had snared only 46 per cent of Qantas shares by the 7pm deadline. It needed 50 per for the deal to be extended another fortnight, when it needed 70 per cent.
But hours after the deadline, the US hedge fund Heyman Investment Associates agreed to sell its 4.96 per cent stake - and APA lodged an appeal to argue the deal should be allowed to continue.
However, yesterday afternoon the Takeovers Panel said no. It ruled Heyman "should have been well aware of the closing time and date for the offer and of the implications of not meeting that deadline".
The Treasurer, Peter Costello, said he wanted more details of the bid and he hoped the "Qantas board will have something to say about their role before the stock market opens" today.
Despite reporting the airline's best ever traffic figures and issuing three profit upgrades since being approached by APA, Ms Jackson has constantly talked down Qantas's profit outlook. "Margaret Jackson must consider her position," said Stephen Matthews, the deputy chairman of the Australian Shareholders Association. "In our view she must stand down."
However, Mr Matthews and several large shareholders back the airline's chief executive, Geoff Dixon. Mr Matthews said Mr Dixon "owes it to shareholders to see his contract out", given fears Qantas could be destabilised if senior management were purged.
There have been questions whether Mr Dixon and his team have been seen as acting in the best interests of Qantas, as they stood to gain up to $300 million in incentives and bonuses if the deal proceeded. APA has declined to concede defeat. Last night it went
to ASIC for a further ruling, but this too was rejected. APA may now begin legal action to keep its hopes alive, but sources close to Qantas acknowledged the takeover was dead in the water.

There is speculation APA could come back with a higher offer, or that Qantas could face several rival bids. "This is going to go down like the London Stock Exchange," said Greg Bundy, the executive chairman of the boutique bank InterFinancial. He was referring to Macquarie's £1.5 billion ($3.6 billion) takeover attempt on the London bourse in late 2005, which was originally viewed as overpriced. The bid was rejected, but the exchange only months later faced a £2.4 billion bid from the New York-based NASDAQ.
Mr Bundy said Qantas could now face a takeover bid from Singapore Airlines - and the price could go much higher. The main obstacle for Singapore Airlines, which scuttled merger talks with Qantas three years ago, is the Qantas Sale Act, which would forbid it owning more than 25 per cent. However, this could be relaxed as the Prime Minister, John Howard, has supported such a marriage.
Singapore Airlines has rejected the speculation, saying it only wants to remain a competitor to Qantas. "There is no doubt that the continued protection from competition that Qantas enjoys from the Australian Government is one of the key attractions for the bidders seeking to take control of Qantas," said a spokesman, Stephen Forshaw.
The Qantas board managed only a two-paragraph statement after crisis talks on Saturday, saying that "the various businesses in the Qantas Group continue to operate in a highly professional manner".

MacBank in the firing line

A simple game of truth or dare was played out on Friday evening in the dying minutes of the ill-fated attempt to hijack Qantas.
On one side was Jim Hoffman, the chief investment officer of Heyman Investment Associates, manager of the Connecticut-based Heyman family's private billions.
On the other side was Macquarie Bank's crack team, which had assumed complete control of bringing in the 50 per cent of Qantas shares needed to keep alive Airline Partners Australia's $11.1 billion bid for the airline. For most of Friday, the bank repeatedly called him. It begged him to sell his shares. As the hours wore on, and the deadline drew closer, the bank became more hysterical. The bid would fail if he did not accept.
But Hoffman had had enough of Macquarie Bank and what he believed was its arrogant
approach to the takeover. He simply did not believe the bid would fail without his acceptance.
About 5pm on Friday, Macquarie received advice that it ought to publish a bulletin, a legal document that disclosed how many shares the consortium controlled. But the bulletin, which would have shown a sceptical Hoffman that the bid was about to collapse, never emerged. Hoffman held on to the shares.
It took another five hours after the bid closed for Hoffman to accept.
US investors believed that had the 50 per cent mark been reached, they would have got more for their shares in a subsequent higher offer. They believed Macquarie was trying to get to 70 per cent in one go.
By the time Hoffman accepted, it was too late.
"This is one of the great f----ups of the world," said one senior executive involved in the process.
The finger-pointing began immediately. The Macquarie-led consortium, facing losses on the deal running into hundreds of millions of dollars, sheeted home blame to the Heyman funds.
However, the senior executive said: "So many people are protecting their arse."
And, said one US source, the suggestion that hedge funds were to blame for the bid not getting across the line was a "complete fabrication".
Several US investors have labelled Macquarie's handling of the institutional acceptance facility as incompetent.
It appears Macquarie may not have covered all bases. In fact, several Australian institutional investors contacted by the Herald on Friday were never even approached by Macquarie to sell their shares in the closing days of the bid.
Mr Hoffman, who spoke to the Herald on Saturday morning from his New York office, read from a prepared statement.

"While we have consistently indicated to advisers that this has always been a close call for us, we are hopeful that our tender will facilitate the successful completion of the transaction."
But by yesterday afternoon, that hope was shot. The regulatory body set up to monitor takeovers, the Takeovers Panel, ruled that the late sale of Heyman's shares could not be counted. The simple game left both sides losers.
Heyman and fellow US investors, including hedge funds, did not want the deal to fail. These high-stakes investors wanted Airline Partners Australia to get its 70 per cent of shares. But they also wanted to remain minority shareholders in some capacity, because they expected the consortium would have to make a second, higher offer to mop up the shares.
Macquarie now bears a scarred reputation in the US, home to the world'smost powerful stockmarket players. And it must weigh up returning with its partners with a higher offer - a possibility floated yesterday.
The failure will also have a heavy impact on the Qantas board, particularly the chairwoman, Margaret Jackson, whose position is now untenable. Many believe she has no option but to resign immediately. It was she who pushed the bid through and then, in an almost hysterical outburst in March, exhorted investors to accept it.
Since then it has been revealed the consortium planned to strip $4.5 billion from the company's coffers in the first year.
Several institutional investors have told the Herald that if she did not resign they would vote against her re-election at the next Qantas annual meeting.
However, US investors indicated to the Herald over the weekend that they would like to see Qantas's chief executive, Geoff Dixon, and his management team stay on, afraid their departure would create a vacuum.
The Qantas takeover has been controversial and disliked. It has united the big end of town with unions, small shareholders and ordinary Australians.
The first to voice opposition, Andrew Sisson, of Balanced Equity Management, galvanised other investors, who had quietly opposed the bid. But even he has urged that Mr Dixon and his team remain. "There is no reason why the executives can't continue to be leading the company if the takeover doesn't proceed," he said in March.
Mr Dixon said yesterday he would continue in his job "at the behest of the board". He stood to earn as much as $60 million in performance fees had the deal gone ahead.

Fasten seatbelts as Qantas finger-pointing begins

The failure of the $11 billion private equity bid for Qantas is humiliating for Airline Partners Australia - and the Qantas board that endorsed it so enthusiastically.
It is almost beyond belief that APA failed to achieve the 50 per cent acceptance threshold that would have automatically extended the bid for a fortnight and given it the option of taking control of the airline.
It was already evident that, after Andrew Sisson's Balanced Equity Management and UBS Global Asset Management's Paul Fiani made it clear they would accept the offer for their combined shareholding of just over 10 per cent of Qantas, that APA wouldn't achieve its original objective of full ownership.
But, with about 45 per cent of Qantas's capital held by hedge funds who had outlaid more than $4 billion to exploit the arbitrage between the market price and the $5.45-a-share offer, APA should have cleared the 50 per cent trigger for an extension fairly easily.
That it didn't suggests that the hedge funds were too greedy and didn't accept for sufficient shares. They wanted to prolong the arbitrage game for another fortnight and in the process they may have cost themselves hundreds of millions of dollars. They appear to have badly miscalculated.
If APA's initial assessment proves correct, the Qantas share price will plunge below $5 a share as the hedge funds scramble for the exit. It will be a messy and bloody period - unless APA signals an early return.
It is remarkable that a consortium as high-powered as APA - it included Macquarie Bank, Texas Pacific, the Allco group and Canada's Onex - could have so misjudged the market and have failed to round up the hedge funds, although the last-minute plea on Thursday from Allco's David Coe for the hedge funds not to take the outcome for granted perhaps indicates a belated realisation that the offer was in trouble.
APA made a costly decision at the outset. It assumed, correctly, that there would be no rival offer. It believed, also correctly, that the biggest obstacle to the bid was political, so it focused on a political strategy. It didn't want to be forced to bid against itself, so it declared the offer final at the outset - and then was caught with no flexibility to respond to the rising sharemarket, Qantas's ever-strengthening performance, and the emergence of the hold-outs, which dramatically changed the view that the complete success of the bid was a fait accompli.
The declaration left APA no ability to increase its price to prise the hold-outs from their positions and their stance appears to have encouraged others toward the view that it might be more profitable to remain a minority in an APA-controlled Qantas than to accept the offer.

But no one, not even Sisson and Fiani, thought that APA would fail completely. Even yesterday the market was anticipating the hedge funds would just push APA across the line, triggering an extension, and giving APA the option - which it probably would have taken - of lowering its minimum acceptance condition further and satisfying itself with simple control.
Its inability to get past that initial hurdle means the bid will close. It isn't beyond the realms of possibility that APA will return quickly at a higher price, given the massive investment of dollars, time, effort and emotion the consortium has made - and the fact that it had locked up the highly-regarded Qantas management.
But if it comes back it will clearly have to be at a much higher price - even if the failure of the bid trashes the Qantas share price in the near term Sisson and Fiani have demonstrated their willingness to take a longer term view of the airline, its prospects and its value.
While APA will be shell-shocked at the failure of the bid to get to first base, the Qantas board will be traumatised. Qantas and its chairman, Margaret Jackson, negotiated a 10c-a-share increase in the offer at the outset (in 24 hours) and then recommended the bid. They continued to not just recommend but aggressively promote the offer even as it became evident that it was starting to run into a headwind.
Now they will have to move into damage control. The problems with the bid have damaged and destabilised the board and management, although as yet it doesn't appear to have adversely affected Qantas's performance. There will be fences to be mended with investors and the community, and reputations to be restored. Enormous pressure will be brought to bear on Jackson and her fellow directors for having misjudged the situation so badly. There will be a lot of recriminations and a lot of fingers pointing in Jackson's direction.
In a perverse way, the failure of the APA bid is actually an endorsement of Qantas boss Geoff Dixon and his strategy - enough of the non-hedge fund investors were prepared to sit on the sidelines and hope they could maintain their exposure to Qantas, despite the looming threats, to cause the offer to fail. They will now be hoping that Dixon and his team see the outcome in that light.