Qantas is rumoured to be interested in buying around 25% of Malaysian Airline Systems (MAS) for up to A$500 million ($291 million). Certainly, Qantas can afford it and Naluri Bhd, MAS's controlling shareholder with a 29% stake, could do with some money if it is to repay half of its M$1 billion ($263 million) debt within the next two years, as required under a restructuring deal agreed with creditors in May this year.
Naluri has denied holding talks with Qantas or anyone else with regard to a sale of its MAS stake, while Qantas has admitted to discussions with MAS, though so far has refused to say what these talks were about.
"Qantas is interested in looking at strategic stakes in other airlines, but it would need influence at board level. I'm not sure the Malaysians would give that," says Ian Myles, analyst at Macquarie Securities in Australia. "If Qantas can't get at least 25% and board representation, they won't even consider a deal," says Salomon Smith Barney analyst Jason Smith.
The Naluri stake in the Malaysian carrier is widely considered for sale, and until recently it was thought KLM of the Netherlands was the most likely buyer. However, KLM is now in merger talks with British Airways, owner of a 25% interest in Qantas, and this is thought to have put any KLM purchase of a MAS stake on hold. Hence, Qantas may have stepped in as a potential buyer.
Under pressure to grow
The need to grow overseas reflects the increased competition Qantas faces on both of its international routes and domestically. Internationally, Qantas is up against the Singapore Airlines (SIA), Air New Zealand (ANZ) and Ansett Australia group of airlines, which formed earlier this year after SIA bought 25% of ANZ, and ANZ acquired from News Corp the 50% of Ansett Australia it did not previously own. On the domestic front, a number of new low-cost carriers are entering the Australian market this year - Impulse Airlines is already up and running, Virgin Blue Airlines is due to take off in September and Spirit Airlines should start flying in December.
Having MAS as a strategic partner would enable Qantas to better address the competitive threat posed by SIA, ANZ and Ansett Australia. Without the SIA and ANZ alliance, which Qantas unsuccessfully tried to block, it seems unlikely Qantas would be looking at MAS. As things stand, MAS is the best, if not only, partner with which Qantas can take on SIA, ANZ and Ansett Australia. What's more, the money needed to buy a strategic stake of 25% could easily be met from the A$800 million cash Qantas has to hand.
Even if Qantas offers a price Naluri will accept for its MAS stake and secures MAS approval of board representation, the Australian carrier would still have to secure Malaysian government support for the deal. Acquiring a stake of 25% or more would push the foreign ownership of MAS above the 30% limit set by the Malaysian government. This limit can only be breached with the approvals of the Securities Commission and the Foreign Investment Committee - in other words, the Malaysian government.
Malaysian Prime Minister Mahathir Mohamad does not want to hand control of key Malaysian companies to foreigners; only on Tuesday this week he spoke out against attempts by US and European automakers to buy Perusahaan Otomobil Nasional (Proton). Like automakers, airlines are politically sensitive the world over and governments are reluctant to let either industry slide into foreign ownership regardless of commercial realities.
What makes Malaysian government approval even less likely is that Qantas is Australian. Mahathir has been the main opponent of Australian involvement in the Association of Southeast Asian Nations (ASEAN), and in May this year accused Australian Prime Minister John Howard of behaving like a bully in respect of Australia's foreign policy towards Indonesia, in particular with respect to East Timor.
