Private capital. A step forward or a step back?

Published as Troubled skies, Geelong Advertiser, Saturday 23 December 2006, p. 25.

In the last few months there has been a surge of financial manipulation which aims to turn a number of Australian companies into private entities, most recently Qantas. Instead of being publicly listed on the stock exchange with their shares being freely traded, and reporting and other regulations applying, these private companies escape much of this scrutiny. Much of the capital for the aggressive takeover of firms is borrowed, so debt replaces equity (shareholding). In a public company, for example, three-quarters or more of its capital could be in the form of shares and a quarter or less might be borrowed. In some private takeovers the proportions are reversed.

Does it matter if Qantas is bought by a group of private capitalists and ceases to be a publicly listed and traded company on the Australian Stock Exchange?  Since the federal government divested itself of its controlling interest, the only influence it can exert is through the foreign exchange requirement that there be a majority Australian shareholding in the company. In this case a consortium led by the aggressive Macquarie Bank and supported by Allco Equity Partners will get round that condition. Allco Finance, whose principal is David Coe, leases a number of aircraft to Qantas.

One consequence of the deal, if it goes through, is that there will be much less public scrutiny of the airline’s policies which will almost certainly include changes in work practices and various measures to improve efficiency, including reducing the size of the in-house workforce. Another is that the airline will now carry much increased debt, so it has to earn enough money to cover the interest on that borrowing. As long as interest rates are low that may not be a problem, but if they rise …!

Substantial fees will be collected by Macquarie Bank whose aggressive financing is reminiscent of the style of the Pyramid Building Society, the memory of which will not have faded in the minds of people in this city. In the late stages of a property or mining boom those companies which take on what appear to be the most lucrative investments often find that these are the most risky and the first to be jettisoned when the boom breaks. It is all getting eerily like the last crash, despite assurances from the Treasurer that the fundamentals of the Australian economy are sound. Given the size of Australia’s foreign debt and the collapse of manufacturing exports in part because of the ‘high’ value of the Australian dollar, it might be wise to be cautious about accepting Peter Costello’s pronouncement. Remember Rob Jolley!