Can the $4bn QR National float stay on track?

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This was published 13 years ago

Can the $4bn QR National float stay on track?

By David Symons

IT WON'T be easy for the QR National camp to persuade the market that plans for its $4 billion float, scheduled for November, remain on track despite equity market turbulence derailing the $1.2 billion Valemus offer.

Early in the year, QR National was the poster child for what many thought would be the ''Year of the IPO'', with up to $10 billion of equity to be raised across a pipeline stuffed full with private equity exits.

That's all changed now, with QR National the only substantial float even going through the motions. However, while the company's coal haulage story might ordinarily be compelling, the Queensland government may soon learn that this counts for little when investor conviction in the market outlook is poor.

In that context, Queensland Treasurer Andrew Fraser's argument that the QR National deal could be differentiated from Valemus as ''QR National is the industry leader, and is leveraged to the mining sector and Asia's growing demand for resources'' misses the point.

Also of little value is Fraser's observation that: ''We have also received significant interest in the business from potential investors over the last couple of months.'' Valemus was claiming strong interest from investors right up until the deal was abandoned. Interest in the business is a necessary but not sufficient step to attracting strong bidding into a book-build.

However, while there are plenty of reasons to be negative on QR National's prospects, the deal does have some points in its favour. Most significantly, government privatisations have a strong track record post-float.

The opportunity to extract layers of costs is the key appeal, a marked contrast to floats brought to market by private equity vendors, or even the local listing of offshoots of foreign businesses.

Yet with fund manager sentiment at a once-in-a-decade low, QR National is unlikely to attract sufficient support from traditional equities managers at anything more than fire-sale pricing, to get the deal away.

This will require the float team to find less-traditional sources of capital to tap. It's a well-trodden path, although every deal is different.

Most recently, the Myer float team milked the Jennifer Hawkins imagery and pressured retail brokers to attract unusually strong mum-and-dad demand to the deal.

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Another example was the Promina float, which just got away in the weak 2003 market when hedge funds (correctly, as it turned out) took a more bullish view of the market outlook than did more mainstream investors.

Fetching possibility

CONSOLIDATED Media investors would do well to review the fetchtv 2 product launched by iiNet yesterday. If fetchtv works as well in the living room as it does in the demonstration suite, it could be the first time that internet television provides a realistic alternative to pay TV for many households.

For $20 a month on top of ISP charges, fetch dishes up an array of digital TV channels, together with a rotating library of movies and children's and special interest programs. Key to the offering is a set-top box with three digital tuners and enough capacity to hold about 600 hours of standard definition television. Note that fetchtv's only clear area of deficiency is in sports programming, which is one of Foxtel's main drawcards.

However, the fetchtv launch comes as Foxtel is already struggling for growth. Indeed, the December 2009 half-year was the first time in the company's history that subscriber numbers did not grow, and analyst expectations for future subscriber growth are muted.

Multichannelling from the free-to-air networks is one factor believed to have slowed down pay television take-up over the past year.

While any change in trends will take some time to emerge, the risk now is that the price differential between Foxtel (which costs at least $80 a month) and fetchtv is enough for Foxtel to lose subscribers to the new medium.

That possibility is not factored in to analyst models, and would drive a rapid de-rating of Consolidated Media should it play out.

Tough lessons

CHANGES to the student visa program, made in a bid to reduce student migration, are set to take the edge off profit growth for companies exposed to the higher-education sector.

That's the view of analysts at Macquarie who have reduced profit growth expectations for Navitas and Seek after surveying education institutions and migration agencies.

While the effect of changes will be clearer after the March 2011 enrolment intake, feedback shows that the changes in the regulatory environment that have driven the closure of lower-quality education providers have had a broader effect on international student interest in Australia.

With high-quality education operators such as Navitas likely to struggle to achieve previous growth forecasts in Australia, Macquarie has cut its Navitas price target from $5.49 to $4.84 due to an increase in the risk profile.

Fuelling student uncertainty are the competitive actions of Navitas's competitors in New Zealand, Canada and Britain. International operators are seeking to dissuade students from considering Australia in light of regulatory change.

Of course, migration and visa issues are not the sole cause of a sentiment shift away from Australia. A stronger dollar and violence towards Indian students have also played a part.

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