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March 3, 2007

Private Equity

Unless you've been asleep, hibernating, or out of the country for the last 12 months, you will be well aware that the Private Equity phenomenon has well and truly hit Australia.

I can't remember when it actually hit my radar, but the KKR bid for Coles [Updated 20/4/07] last year (ie 2006) was one of the first to come to my attention. I was certainly aware that KKR was part of the successful bid for Myer, but that didn't seem to be much cause for concern. Coles Myer hadn't known what to do with the iconic and once hugely successful Myer brand for a long time and its stores were floundering despite Dawn Robertson's best efforts. Count in that the consortium included the Myer Family and it all seemed like a good idea.

But then the separate semi hostile bid for Coles raised a lot of hackles in the community here. Coles was another iconic Australian brand grown from the battler success story of C.J. Coles — albeit suffering at the hands of the much more successful Woolworths. A lot of Australians just didn't like the idea of big money from the USA trampelling all over our heritage.

But the big one of course has been the APA bid for Qantas. There's nothing much more iconic than the Flying Kangaroo. Unlike Myer and Coles, Qantas is a succesful business. But Qantas represents more than an icon. It represents the working conditions of thousands of Australians and more than a million people in this country value (like me) our Qantas frequent flyer points. Now of course APA claims to be majority Australian owned and Australian controlled – it needs to be to satisfy the conditions of the Qantas sale act. However a significant amount of foreign money is involved in the bid and questions remain around the degree to which the act applies to Qantas' subsidiary Jestsar. What will happen to the working conditions of QANTAS and Jetsar employees. Will they all be moved to Australian Workplace Agreements, in the process losing hard won benefits? Will maintenance operations be moved overseas? And, for millions of Australians, what will happen to my frequent flyer points.

Notwithstanding that I think the last of these questions is really of much import, the others are of great concern to those involved and represent possible encroaching by example of the working conditions of millions of Australians.

However, to my mind, none of these is the most important concern. What bothers me most is whether the private equity partners in this deal (or any other for that matter) have any concern for what happens to their prey in the long term. Take Qantas as a case in point. APA cares for one thing and one thing only – the profit they can make from the deal. My concern is that APA will simply convert value into cash in its own pockets.

Now I might be wrong about this. Certainly the supporters of private equity argue that these arrangements enable owners to free themselves of the short-termism of public equity. They can be allowed to make losses, or at least not grow profit at the rate required by the market for extended periods. This, in our mind, is a good thing.

However, is this really what they will do?

I guess we will have to wait and see.

Posted by chriscurnow at March 3, 2007 3:43 PM

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