I see the AFR is reporting on a UBS research note that concludes...

I see the AFR is reporting on a UBS research note that concludes that there is relatively high probability of ACCC approval of the acquisition, however they do note that they expect a 9 to 12 month period until the deal is completed. AFR report that Morgan Stanley are more cautious on the ACCC process outcome.

AQZ shareholders are in a state of limbo until the ACCC determines whether or not it will approve the deal. The AQZ announcement notes:


This suggests that until ACCC clearance is received, shareholders won't know what the independent expert thinks AQZ is worth and shareholders won't have the chance to vote on the scheme. So for the next period, we are in the dark as to AQZ's future prospects and valuation. Accordingly, I think the AQZ share price will continue to trade at a reasonable discount to the $4.75 scheme consideration. There are a couple of positives with the Scheme (1) with the consideration being effectively fixed due to the number of QAN shares only being determined over the 20 working days prior to the record date, changes in the QAN share price won't impact he value of the scheme consideration and (2) AQZ's ability to pay a 18 cps share annual dividend to the extent that the scheme in not implemented by 5 November 2022 (pro rated for the number of months or part months after 5 November)).

At first blush, the $4.75 doesn't appear compelling to me. QAN note that the deal is expected to be EPS accretive prior to synergy benefits (although given the QAN is currently making a loss it is an interesting statement). This suggests to me that maybe $4.75 is too low.

There is scope for activist funds to get involved in an attempt to squeeze some more value out of QAN, however the opportunity for this probably needs to wait until there is an indication that ACCC won't block the transaction.

I think that AQZ is strategically important to QAN for the following reasons:

1. With the QAN fleet replacement underway, AQZ offers QAN a home for the new A220's with a much lower cost structure than QAN itself or Network Aviation. Staffing costs in AQZ will presumably be cheaper.
2. Controlling AQZ puts the squeeze on Virgin Australia and cuts AQZ out as a source of wet lease aircraft for Virgin. It alsp puts the sqeeze on Virgin's F100 operations thta have a co-operation deal with AQZ.
3. Prolonging the flying of QAN's existing F100 through access to AQZ's spares will defer further QAN fleet replacement capital expenditure.

Is there any chance of a competing proposal from Virgin Australia or does the existing 20% QAN shareholding stymie this? Maybe a 20% blocking stake in AQZ acquired by Virgin is a possibility!

Given that QAN effectively can't vote on the scheme, there will need to be 75% of the remaining 80% shareholders who vote that will need to agree to the deal. Unless the transaction is compelling, retails shareholders should not assume a favorable vote will get up.

One concern I have is that if the AQZ directors think $4.75 is a good price, maybe AQZ's future profitability isn't as good as retail shareholders currently think.