The Texas-based company behind the Qantas buyout bid is coming under increasing scrutiny, as it has been involved in many similar operations in the US, reports Peter Westmore.
The Texas Pacific Group, the American company behind the Qantas buyout bid, is coming under scrutiny as it has been involved in many similar operations in the US.
A Senate committee is investigating the Qantas sale, as the law currently does not prevent Qantas’s fully-owned subsidiary, Jetstar, or other associated companies being sold off or moving offshore.
There are striking parallels between the Qantas takeover, in which former Telstra chairman Bob Mansfield and Macquarie Bank have taken the public role, and controversial takeovers conducted by the Texas Pacific Group (TPG) in the US.
For example, when TPG planned the takeover of the Portland General Electric in 2003, it asked the former Governor of Oregon, Neil Goldschmidt, to chair the board of the company to run the electricity utility.
While publicly claiming that it was a long-term investor in the electricity company (which had previously been owned by the bankrupt Enron Corporation), TPG was forced to submit its business plan for the $2.35 billion takeover with the Oregon Public Utility Commission for approval.
These documents directly contradicted statements made by TPG’s representatives that the company was a long-term investor. They made clear that Texas Pacific planned to make the company more profitable by wholesale layoffs and dramatic cuts in maintenance, and intended to sell the utility in five years for a huge profit.
The Oregon Public Utility Commission which was responsible for evaluating the bid, unanimously rejected it as not in the best interests of Oregon.
The Commission cited a large debt burden and short-term ownership as the major sources of risk, while discounting the benefits of the deal claimed by TPG.
The large amount of debt to finance the purchase was the “primary source” of potential harm to PGE’s customers, the Commission order stated. “It is the single biggest source of risk,” said Commissioner John Savage.
“The high debt percentage would likely result in lower credit ratings for PGE than it would in the absence of this transaction.”
Significantly, the acquisition of Qantas by the TPG consortium would be funded principally by $8 billion in debt, and only $3 billion in direct investment.
The effect will be to saddle Qantas with a huge debt which will affect its creditworthiness.
Texas Pacific, which is based in Fort Worth and San Francisco, gathers cash from pension funds and wealthy investors and uses it to buy control of companies.
The public face of the takeover is Bob Mansfield from Airline Partners Australia. Mr Mansfield is a former chairman of Telstra and currently chairman of Com Tech Communications and CDs Technologies, but has no experience in the aviation industry.
The principal source of aviation expertise among the Qantas bidders is the Texas Pacific Group.
The bidders’ statement for Qantas refers to the “acquisition” by TPG of Continental Airlines in the US, of how Continental has been “improving and growing”, so that “today, Continental Airlines employs around 5,000 more people” than it had when acquired by TPG in 1993, and operates a fleet of aircraft that has expanded from 319 to around 630 aircraft currently.
In fact, Continental Airlines was not acquired by TPG, but by a consortium which included TPG and Air Canada. TPG in fact sold most of its shares in Continental Airlines in 1998, at a substantial profit.
The bidders’ statement also said that the Texas Pacific Group “acquired America West Airlines out of Chapter 11 bankruptcy and helped rebuild the airline which, following its merger with US Airways, now has 357 aircraft compared with 85 at the time TPG Group invested”.
In fact, a consortium led by TPG acquired a substantial shareholding in America West in 1994, but sold most of its equity stock, at a substantial profit, in 1998.
Later, a pension fund took legal action against America West and TPG, alleging that aircraft maintenance had deteriorated dramatically under the ownership of Texas Pacific Group and that throughout 1997 the US Federal Aviation Authority continued to conduct inspections, find violations, and issue warnings to America West Airlines regarding its maintenance operations.
The pension fund also alleged that in 1998, in order to obtain a higher sale price, the Texas Pacific Group and Continental Airlines sought to push the price of shares in America West Airlines higher by false statements about the company’s outlook and represented that the improved financial returns of the company were due to exceptionally efficient management, rather than unsafe maintenance practices. (US Court of Appeals for the Ninth Circuit, February 13, 2003, at p.2069).
The action was finally resolved in an out-of-court settlement, with TPG paying the pension fund $15 million.
The bidders’ statement also said that TPG had “made a significant investment in European-based Ryanair in 1996 and today Ryanair is one of the most successful low-cost airlines in the world having gone from eight aircraft when the investment was made to 107 today”.
However, the Texas Pacific Group consortium acquired just 20 per cent of the stock in Ryanair in 1996 and sold the bulk of that investment in 1997.
It is deceptive and misleading to claim that TPG has a long-term commitment to Qantas when the record on which it relies to justify the takeover shows exactly the opposite.
– Peter Westmore.