Cargolux, a Postmortem

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Cargolux, a Postmortem

We know what happened with the Qatar Airways - Cargolux deal. It just was a mindboggling adventure that in no way was a "good deal", and was miserably negotiated. It would barely have helped Cargolux, but rather to the contrary would have and indeed has hurt Cargolux.

In the aftermath of such an ordeal, any serious company on earth would have licked its wounds, maybe would have apologized even for failing to responsibly lead the company, and would of course have committed itself to take every step possible, so that the same mistake will never be made again. Alas! The same mistake was  made again and in a hurry. Almost no one would have expected this to happen twice. I give up on quoting Einstein on insanity.

I would have expected a thorough evaluation of the company after the QR debacle, very probably the replacement of the CFO brought in by Qatar Airways, not as a sanction, but as cautious good governance. He came from the other side. I would have examined the reasons why and if indeed the Luxembourg government had to get rid of its Cargolux shares, and establish the list of mistakes made in that flawed QR deal: the valuation of the deal, the question of the minority shareholder's veto right, the attractiveness of the various other possible partners.

It appears that none of these has been seriously undertaken. The HNCA deal is justified by general talking points by those who made it happen. There might be good prospects in the particular HNCA deal. But then it would certainly be easy to articulate and demonstrate these. That China is a big country and will offer many possibilities is very general. That other candidates didn't line up, is nonsense. When Mr. Bausch announced he would negotiate for further last minute landing rights in China before traveling to Beijing, he got the Chinese equivalent of Luxembourg's "dann misst een emol kucken". They have to think about it. He travelled to sign the minimal agreement, which he could have done in an environmentally friendly manner by scanning and Emailing, which as we know has a lower carbon footprint.

More generally, the deal has been pushed, though a very respectable law firm, Shearman & Sterling was hired to give their best professional advice: they concluded that the agreement needed a lot of work. Very often governments and companies hire an outside consultant to say loudly, what the client didn't want to say himself. Well, this wasn't the case with Shearman & Sterling. According to an ever growing number of excerpts of leaked correspondence, the opposition to the deal was vast at the management level.

Logically, in such a case you hire another consultant. The very basic strategy is revealed by the emerging details of a damning correspondence reported by Radio 100,7 and also reported by tageblatt. The role of the "informateur" Mr. Schaus is questioned there, for seeming to be of the second type of consultant: the clients megaphone and green light barrier guard. Insiders talk about conflicts of interest, as Mr. Schaus had been suggested as a CEO candidate early on, as he started his role as consultant.

I had high hopes that such an outside consultant would conclude to, and indicate a wider spectrum of options for Cargolux, in the true Bain Capital approach, for which Mr. Schaus worked previously. Options that could have been debated and weighed by management. I have seen a number of brilliant analyses and advice brought together by Bain. This would also have satisfied the neutral observers, which is of course not the case if the only outcome is to confirm the for whatever reasons wishful agenda of the contracting party. In particular this one statement is available on Radio 100,7. It is both a superficial endorsement of the Chinese partnership, with a built-in preemptive excuse for future failure, that is already squarely put on uncooperative management. We succeed: it is the merit of the innovative thinkers. We fail: that's because of the uncooperative Management.

Radio 100,7: " …) There is a broad and remarkable consensus among the vast majority of players (management, board, even trade unions and third parties) that the management team in its current configuration and mode of operation is dysfunctional. This is a serious issue that needs to be addressed as soon as possible and preferably before any entering in relationship with a third party. Similarly, the equity split between the different (Luxembourgish) actors and the composition and mode of operation of the Supervisory Board need to be revisited and reengineered.

If the issues are not addresses successfully, the outlook for the venture will be doubtful in any case. On the other hand, if these issues are tackled, the partnership with HNCA sounds promising. Risks are limited, but much more importantly, this may be the opportunity to give Cargolux a new lease of life and to support it in securing a stable base in Luxembourg based on sustainable global growth."

But wait: what exactly is this to say: ".... the management team in its current configuration and mode of operation is dysfunctional." Did managers want to leave? Did someone want them to leave, as this language may suggest? In any case, responsibility for future failure after their departure lies with those who stay.

A clearer image emerges thanks to the personal details coming out of the trenches. Exposing those tactics on the ground, it is going to reveal the strategic Cargolux agenda in a starker way.

For now one can conclude that by signing the deal, the Luxembourg government has lost its freedom of action, though it might hope that by getting rid of its shares means that the ordeal is over. It is trapped, and there is no way out either of the deal, or future problems.

The Chinese party still has a backdoor open. Beijing has to approve the deal later this year. It should, because HNCA got tremendous advantages, with only some shabby USD of exposure. The Luxembourg side convinces itself that there is hope, that everything they always wanted to ask for from HNCA, but never dared, will eventually come together. But hope is not a strategy.

http://www.100komma7.lu/emissions/2014/01/29/cargolux-zitater-aus-de-breiwer-vun-ex-direktiounsmemberen-an-aus-dem-robert-schaus-rapport/