Cargolux - Qatar Airways: Anatomy of a forced marriage

My Orchids. Hybrid. Photo ET

Cargolux - Qatar Airways: Anatomy of a forced marriage

By divine intervention or was it a prime-ministerial one, a hallucinating Series B spy story, with a B as in Bommeleeër (the Luxembourg home-grown terrorist saga), is coming along to conveniently hide the final words on the forced and failed Cargolux marriage with Qatar Airways. But the final word on this is that the marriage was a mistake, a wrong solution to a real problem, an unnecessary and superfluous operation, opaque and dubious, abusive and costly. The failed marriage leaves Cargolux a divorcee with more lead in the wings than before.

The sale of 35% of Cargolux finally had no other purpose than to give private investors a way out.

The plan to hook up with an "industrial partner" who would also provide access to capital, without specifying how, was a great theoretical thought. It is this the fragile basis for the erroneous assessment that has been made to get into this partnership.

The reality is that two companies that are active in the same sector are essentially competitors. The thought was that the partnership with Qatar Airways (QR), would produce windfall benefits to Cargolux (CV). It was only a dream devoid of good due diligence, and according to my sources, there has never been much of such a prospect, nor even formal promises from QR. There was only wishful thinking on behalf of CV and its Luxembourg fairy godfathers. In the words of Mr Juncker, the partnership would provide new routes, new customers, new business and new jobs to CV. This assertion was based on no agreement, no business plan. But CV  projected 500-600 tonnes of additional freight per week to hit Findel, and Luxair saw an impact on its future handling revenue, increasing by several million dollars. Not to mention the windfall in cash from the sale of a chunk of its stake in CV.

According to my sources again, due diligence conducted by QR was extensive, but it actually granted no reciprocity to CV and Luxembourg. QR demanded thus by contract to have access to all accounting, commercial, operational, organizational and legal information on CV. No reciprocal demand of this sort was made to QR! I must conclude that up to today, CV does not even know if QR is profitable, who their customers are, any obligations it has to third parties, what its development strategy is in relation to the development of the Doha hub. All of which is essential to understand QR's business and strategy. Indeed, the Luxembourg negotiator, always so keen to hire expensive consultants to draw foregone conclusions, in this case was almost nonexistent.

And the lamentable valuation of $ 117.5 million for 35% of the company is evidence of this incompetence, if not bad faith. A vague reference to the book value of the company was done, but that's not enough to convince ordinary people of the merits of this valuation, worth $ 335 million. Cargolux should have been worth more to a buyer who is almost a start-up operating 4 planes and has been in business for 5 years only. CV has 42 years of experience, more than 1500 well trained employees, routes, customers and markets. At the end of 2010, showing a profit of $ 60 million, there it would not have been arrogant to assign a valuation to CV between $ 500 million and $ 1 billion. The ignored candidate for an acquisition, the Chinese Yangtze River Express / HNA was not mistaken: it offered to open negotiations at a low price of $ 175 million for 35% of CV, certain that the seller would ratchet the price upwards. This was an acquiescence to a valuation of at least $ 500 million. The Chinese candidate even sweetened its proposal with an offer of a $ 200 million loan at 2% interest. On the other hand, QR only vaguely offered to increase its stake to 49% with no indication of price or conditions. The issue of providing additional capital as well as the "synergies" remained cleverly vague and hidden, whereas the focus was on what seemed to be the top priority: liberate the private shareholders, especially BIP and BCEE's investment fund Luxavantage under the best possible and even impossible  conditions. This episode inside the case was detailed in an article by V. Poujol in the Land (1) and is worth to be recalled here.

QR's acquisition of 35%  of CV was a variable geometry transaction.

It was a game mixing common shares and preferred shares, which during a fiduciary operation entrusted to ING Bank, made them appear and disappear like in a Las Vegas Magic show. The transaction, which would probably be illegal in most Western countries, has in fact provided a bonus equivalent to a $ 12.50 dividend, which represents in fact a bonus of about 40% for preferred shares held by BIP and the Luxavantage fund of BCEE, which both were allowed to liquidate all their positions. SNCI and BCEE Bank, which are both owned 100% by the State and Luxair simply converted their preferred shares into common shares at the rate 1:1, so without the gain of 40% that BIP and Luxavantage were given. The State strangely did not own preferred shares itself. The State however, which is us the tax payer, through its holdings in SNCI, BCEE and Luxair did give up capital gains of approximately $ 43 million in the conversion 1:1, but allowed private investors to fully cash in a bonus of nearly $ 7 million, thus discriminating against its own interests.

This is a government that decides who makes a profit.

This is what I call the state corporatism. By privileging QR at the detriment of Yangtze, the State has also decided against the Chinese investor, who had offered $ 175 million for the same participation, which is 50% more than QR, and valued the company at $ 500 million. That's $ 165 million more than CV's valuation in the QR deal. BIP and Luxavantage shareholders who were so eager to get out of there, at the best price I guess, can calculate their shortfall by snubbing the Chinese candidate. About 50%. And don't believe the excuse that exclusive negotiations with QR prevented the Chinese deal from being considered. The exclusive negotiation with QR was limited to the standard three months that lie in this kind of contract between the signature and the "closing".

No one has heard any protests against this discrimination from those governmental  shareholders. BCEE being present in the deal as both a bank and as the Luxavantage investment fund, had to exhibit quite a case of schizophrenia: under the same signatures it had to approve the preferred treatment as Luxavantage and the discriminated deal as the government owned bank. This is evidence that state corporatism tends to promote its most faithful and obedient members to key positions. Leadership through consensus. Need real leadership? Then here comes Mr. Al Baker with QR, who draws the same conclusions as I just did.

Abusive marriage

CV's prenuptial agreement with QR already leaned totally in favor of QR, giving it access to all the secrets and information without any real reciprocity. Mr. Al Baker arrives in Luxembourg in September to consummate the marriage. According to his announced principle that "His Highness kicks ass," he tells the management of Cargolux that they are incompetent and tells Boeing that they sell junk, causing quite a stir and embarrassment, as the first beautiful and festive delivery of a Boeing 747-8 was aborted.

We know the sequence in which CV loses its dowry, its customers, its confidence and its stability. The absence of synergies, of new business and the accumulation of evidence of threats called for common sense to correct the trajectory. Plans in the drawers, or those simmering among various consultants, or simply some existing agreements and decisions made employees fear the worst. And many ideas left no room for any emotional attachment to Luxembourg. They were all numbers. Unions have probably seen the potential trap that existed in a takeover by QR not only in fact, but also formally. For QR could extend its holdings up to 49% of CV. However through Precision Capital's acquisition of BIL it would become shareholder of Luxair, itself shareholder of CV: taking influence was pre-programmed. Even more hidden was the opportunity for total control in the corollary rule that 51% balance of CV should be held by European groups: Precision Capital is a European group.

It was probably impatience and prima donna attitudes that have alarmed many people and put the Luxembourg public on defense against QR. The formal reason for this divorce is in fact superficial and even absurd: QR's candidate for CEO, Mr. Forson has not been accepted by the Luxembourg shareholders, who at the same time they expressed their confidence in him. The reasons are deeper as we know. The Las Vegas divorce lawyer would call it "irreconcilable differences".

Make our divorcee even more beautiful

What a mess. Add to the mess two years of missed opportunities. Of course, nobody bears any responsibility in a system of state corporatism. The State Anonymous denies and dilutes responsibilities. But finally it has to realize, after yet another blunder, that Luxembourg lost much of its economic substance in recent years, and that losing Cargolux would be the final leap into a disaster of great magnitude. Meanwhile CV needs investors because its problem continues to be a question of capital, more than an "industrial strategic partner". In the meantime the state has no choice than to fill the gap, consolidate, save, develop CV.

Regarding the ideal cargo partner, it does not exist. Assuming QR wants to sell its shares, the other shareholders have the right of first refusal. By the end of the day, this will be a kind of auction. So, to get started, who offers the first $1 for QR's shares? But in the meantime QR retains its contractual rights.

If you really need another "strategic" partner, here's a little drawing: would it be better to join forces with someone who is geographically far away, less likely to compete, operates in a large export market in full development, more likely to cooperate, ( not necessarily China), which therefore offers more than this other choice, which is closer, a beginner who has to learn, who wants to build a major airport in Doha, close to his cousins ​​who also want to build the same thing just 50 km away?

(1) http://tinyurl.com/d2vnuk6

Cargolux, the epilogue, but not quite

My Orchids, Hybrid.  Photo ET

The Cargolux - Qatar Airways adventure lasted 17 months, a story of contradictions and contrasts. To many it was a surprise venture, and quite some thought that it couldn't succeed from the beginning. Those were right, and they watched surrealistic developments that led to a break-up last week.

First Cargolux shareholders sold 35% of their holdings to the lowest bidder, in a surprise initiative taken by Minister Frieden on a visit to Qatar. The deal was sealed after a number of closing steps that saw discrimination between the sellers. The cultural and strategic mismatch between the two companies became apparent immediately.

There was quite a discrepancy in negotiating skills, that favored QR. Its aggressive style punched the Luxembourg Board members into submission, as appeared early on during the Boeing delivery crisis. Many rather also wanted to hide from reality, and make light of QR taking advantage of CV's routes and clients. QR's dominance in the Board also was apparent when they imposed their man, Richard Forson, as CFO, and later as interim CEO. So was the nomination of "independent" Luxembourg Chairman Wildgen, labeled Mr. Qatar by the unions. Finally the unions found issue with the new style that seemed to be inspired by QR, obviously not used to democratic process and unions in its homeland. In short a mismatch, not even a marriage of convenience.

The ensuing breakup is a vaudeville.

On Thursday, the family of the Cargolux bride defended the bright prospects of the marriage. The following day the groom slammed the door. The romance that never was, was over. At issue was the Luxembourg governmental shareholders' refusal to have the QR man Richard Forson as a CEO. Which also upset the Luxembourg "independent" Chairman Wildgen, who re-slammed the door. Then Oliver Wyman's people, working on a strategy paper got the door slammed also. No more need for their strategy paper.

Today, Cargolux confirmed the door slammings. Interestingly, the Luxembourg governmental shareholders also reiterated their confidence to Richard Forson. But wait, wasn't that the issue for the door slammings? Chaos. In a US corporation, Mr Forson, because of his affiliation with QR, might have gotten another treatment, 30 minutes with security escort to the front door. But Mr. Forson is useful.  He signed the CWA cancellation the other day. This is to tell unions and employees not to cheer too much. Indeed Cargolux needs to fix problems. Among those are many wounds inflicted by the disastrous partnership initiated by Mr Frieden and that translated into an aggressive cannibalism by QR, which came to an end last week.

There are urgent things to do. One is for the government and the company to show optimism. There are enough potential partner airlines and financial solutions out there. At this juncture that optimism has to be communicated. Then thereafter comes the time for transparency and reckoning.

Qatar Airways leaves Cargolux

My Orchids. Phalaneopsis. Photo ET

So that seems to be the logical and indeed sad conclusion of a murky mismatch caused at the hands of the Luxembourg government. The hasty and secret deal with QR bears many marks of incompetent, ill advised, confused, legally questionable and otherwise incomprehensible strategies. Except on the Qatari side, which had a vision tied to their own business plan, negotiating skills that provided for a very good deal with a new partner which obviously was extremely weak, superficial and according to the chief Qatari negotiator, “incompetent”!

The only flaw in the Qatari concept (and its Luxembourg allies) was that it is not foreseeable in Qatari culture that public opinion and unions might beat you back. It is a hard lesson learnt, also for the Luxembourg government, that by being careless, unprepared, uncoordinated and incompetent you jeopardize international relations because of your behavior. And don’t come up again with the excuse that chit chat ruined your marvelous project. By the way, try to buy back QR’s 35% for $1, not $117.5 million. That’s the value of Cargolux clients taken by QR during this venture.

There is a plan B. Please, reassure us that negotiators on our side are not the same again! And please sell new shares to the newcomers to raise cash, not those belonging to the crowd that jumps off!

Unfortunately, there is more to come. From a 2010 profit for CV, losses are back due to the loss of clients and tough economic times. There were also 18 months of lost opportunity during this failed marriage. Together, that will still be a tough situation to correct.

Qatar: The Grand Duchy of Luxembourg's major strategic decisions

My Orchids. Phanaelopsis. Photo ET

Qatar: The Grand Duchy of Luxembourg's major strategic decisions

Translated from French: http://feierwon.blogspot.com/2012/11/qatar-les-grands-choix-strategiques-du.html

A small country knows that quite often one needs greater than oneself. The reverse, that often one needs smaller than oneself, generally only flourishes in fables. Armed with this wisdom, Luxembourg has always worked to compensate for its weaknesses by joining alliances with larger than itself for its security, for economic partnerships and political unions. Some people gave our recent relations with Qatar the character of a "strategic relationship". Is Qatar really a strategic relationship, and what is the strategy? Is it bigger than ourselves or did we need smaller than ourselves?

Our traditional strategic partners

Historically, Luxembourg always needed bigger than itself economically. This was the case with the Zollverein, followed in 1921 by a very close economic and monetary relationship with Belgium by signing Belgian- Luxembourg Economic Union (BLEU) Agreement. The postwar period saw the expansion of the BLEU into Benelux first, leading later to the EU.

For its external security, after the lessons learnt on the validity of its former "permanent neutrality," Luxembourg joined the Western European Union (WEU), a panicky reaction to Soviet expansion after WW II, and thereafter NATO, which is basically the American nuclear umbrella. These policies were designed to provide Luxembourg with economic and financial stability, markets, innovation and ensuring its external security. They were backed by a broad national consensus. Those agreements between States also encouraged  everyday economic and cultural exchanges, and invited foreign companies to establish in Luxembourg through targeted promotional campaigns in the United States, Japan and European countries. In short, it opened up Luxembourg to the outside world.

Is Qatar a strategic partner?

Indeed yes, we have to assume that, given that official exchanges at the highest level have initiated the subsequent economic relations, of which both governments are even part of. These were initiated as a willful policy, and so indeed represent a strategy. Is it a providential one  and was it well thought out?

The Gulf flows over with oil and gas riches. These resources are typically held by sovereign wealth funds where the country's "sovereign" and the fund are often the same entity. They can also be found in a series of "family offices",  quasi private banks. An international financial center is certainly not prohibited to attract this clientele. But it is a special clientele and as such needs special scrutiny and  care.

Luxembourg's strategy is illustrated by multiple visits to Qatar by MM. Krecké and  Frieden and occasionally the Luxembourg Crown Prince. My old instincts and experience made me question this enthusiasm, which seemed too boundless for this type of partner (1) (feierwon.blogspot.com June 23, 2011). The best evidence of the large cultural gap that Luxembourg was going to have with Qatar was given by Minister Krecké, who said on occasion that "if we remain committed to our principles, we will lose the business!" It is exactly that point that a prominent member of Amnesty International, Robert Altmann, has brought up in a public letter about that new friendship. (2).

Objections are not limited merely to matters of principle. The culture shock is also quite large. The constitution of Qatar is such that it certainly will not serve as a model for the ongoing revision of Luxembourg's constitution (3). Islamic law is applied, which is likely to ruffle a few feathers in the West. Labor legislation is rudimentary, tens of thousands of migrant workers are subject to the whims of employers and trade unions do not exist.

Already some fundamental policies of Qatar seem to contain a source of conflict with the international positions of Luxembourg, if not with Luxembourg mentality. Thus there is already conflict with a Luxembourg membership in the UN Security Council, our position on Hamas which we consider a terrorist organization, but is the object of financial largesse and support by Qatar. The Middle East as a whole is a minefield for our diplomacy executing a delicate dance between UN, Hamas, Qatar, Iran and Israel. It is true, as Mr. Krecké observed, that you cannot maintain such a relationship without abandoning some principles.

Finally, and this is almost a caricature, Qatar is a prominent member of OPEC, which is a cartel that manipulates oil prices, the same way as Cargolux, which has manipulated airfreight pricing in collusion with other Cargo airlines. Cargolux has been punished, Qatar and OPEC not yet. But they will be twice: first, when the United States pass legislation known as the "No Oil Producing Cartels Act" which also produces  the nice acronym "NOPEC", to put an end to blackmail the OPEC. The second shock is about to happen with the fast development of shale gas and oil in the United States and around the world. Prices are being slashed, with US reserves in excess of 20 times those of Saudi Arabia. It is in this environment of conflict, disagreement and misunderstanding and cultural disharmony that Luxembourg believes it has found a new strategic ally?

Cargolux: Lucky Luke, out of luck, gets stuck

Under a blazing sun in February 2011, Luc Frieden arrived in the sands of Qatar. He would come back to Luxembourg with, to the general surprise, an agreement for the participation of Qatar Airways in Cargolux. Some say they were not aware of this initiative. Yes, they were says Frieden. Meanwhile Frieden staged his own trilogy of Wallenstein with his friend François Pauly as the lead actor, according to "Forum". Pauly joined Hinduja first, to eventually take the helm at KBL, pending its acquisition by Hinduja. But finally, as the Hinduja deal fell through, in the third act he switched horses and rode into the same position at BIL. This is probably one of the famous synergies antics that were otherwise announced. So that's at least one objective attained by Luxembourg, however limited and tactical it was.

Qatar for once has bigger visions than that. As far as all the other announced Luxembourg "strategies" from 2011 go, they just sound today like superficial  and hollow slogans, not really thought through. In retrospect it sounds like a vaudeville, hearing Mr. Juncker, who it seems is already the holder of the order "Wider den Thierischen Ernst" make a number of grandiose comments on the occasion of the visit of the Prime Minister of Qatar in June 2011. He announced that through this marriage arranged by Luc Frieden, Cargolux would open new routes, embark on new clients, increase business, create new jobs. I understand if nobody laughs at that type of humor, a year later.

It is remarkable that Qatar, through its Precision Fund, acquires all its Luxembourg properties below valuations previously announced: € 300 million below the price offered by Hinduja for KBL, 50% below the first acquisition price for BIL, and about $ 60 million less than HNA / Yangtze for Cargolux. These tactics in business are called "Bait and Switch". Shouldn't anyone explain to the good people of Luxembourg how come that Ali Baba is emptying our cave, and seems to know all our passwords?

On the other hand, we have remained the champion of financial and regulatory engineering. Together with the superb (yes, they are) negotiators from Qatar, we didn't rest until we found the tricks to circumvent the objections of the European Commission to a future increase in the participation of Qatar Airways in Cargolux, by establishing Precision Capital Luxembourg. Precision became European, et voilà! They have a mission and goals, and they put in place the means and resources to achieve those goals. Which are truly large and numerous. We on the other hand have been naive and are in a crisis. We have developed a mentality of losers. Our visions and objectives got down to that level.

Another small Luxembourg endeavor and particular purpose was to allow private investors to exit from Cargolux through financial acrobatics that favored them, by using a trust agreement with ING. The "Land" has called the operation "Friedengate."

Cargolux: The Luxembourg Government decides who is making a profit.

Mr. Frieden questioned by RTL sees no problem in the blatant discrimination against State holdings in Cargolux. Everything is legal and transparent, and will be shown to the public, which has the right to know, as you know. At this point, the narrative almost appears as a practical exercise in a course to explain sophism and other fallacies: Cargolux had stopped negotiating with Qatar Airways, but finds itself bound by an agreement that it did not agree to? The Chinese offer of HNA was 50% higher, but we preferred to sell for less? And though we wanted to sell for less, private shareholders wanted more anyway?

Mr. Frieden said that it is normal that the shareholder who withdraws deserves higher pay. Everyone could have obtained higher pay with HNA. And by using the same discrimination against BCEE, Luxair and SNCI the windfall for the private shareholders would have been even bigger, according to this logic? Which establishes a wonderful rule, that in this case, as a shareholder, the less you earn the more you receive if you are private? Cargolux employees would readily endorse such an idea for themselves. Alas, the story is not credible:

First of all, the State also wanted to withdraw, but did not get preferential treatment, as didn't the parastatals, which also ceded part of their holdings.

It is not the international practice either. It is contrary to popular wisdom, that someone who retires, who wants to get off the Titanic, is allowed to leave with all the cheese. Conventional and professional wisdom would normally sell to the highest bidder, which is the Chinese group HNA.

Equality between shareholders is also violated. How can one trivialize this? It is about taxpayer's money!

And finally the argument that the higher value given to the leaving private shareholders' holdings also  increases the value of shares held by those who remain is just misleading and false. That valuation has been ratcheted down through the effects of the discriminatory sale, and by the psychological effect of the public witnessing all those private investors stampeding out of Catgolux. Which further pulls Cargolux down. No the valuation of Cargolux has decreased under the triple blow of the QR low bid, the discriminatary sale and the stampede. One should not make a virtue out of a vice.

Like what, certain strategic relationships can go astray.

(1) http://feierwon.blogspot.com/2011/06/cargolux-la-catharsis-par-les-qataris.html

(2) http://www.slideshare.net/marcthill68/le-qatar-un-pays-ami

(3) http://www.qatarembassy.net/constitution.asp

Crash in style: Lamborghini Diablo ruined in Luxembourg

My Orchids. Phalaenopsis, a flower to match a Lamborghini. Photo ET.

This incident really puts Luxembourg on the map. From the remotest parts of the virtual world, you can get this information again and again. There are special venues where you can see crashed luxury vehicles, like this one:

Lamborghini Diablo ruined in Luxembourg

Should we call it Schadenfreude?
No word about how the driver is doing. Or what he/she told Daddy.

Tax haven of Luxembourg also permanent resting place for 5,000-plus U.S. soldiers - Montrose Daily Press: News: world war ii, luxembourg, george patton, anthony mcauliffe, united states

My Orchids, Paphiopedilum. Photo ET

In case you didn't read the Montrose Daily Press today. I know, they really stick it to us with the "tax haven". But is well intended, and nonthreatening here. People of montrose, remember the difference between tax avoidance and tax evasion: 5 years.

Tax haven of Luxembourg also permanent resting place for 5,000-plus U.S. soldiers - Montrose Daily Press: News: world war ii, luxembourg, george patton, anthony mcauliffe, united states: Greetings from Luxembourg, a little landlocked country of a half-million people that boasts the second-highest income of any country in the wo…