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
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