Private equity purchase of Rex not the government’s preferred outcome, say experts

Rex collapsed into administration last year with debts of around $500m.

The administrators of airline Regional Express and the government face a dilemma over the domestic carrier: Whether to allow private equity to buy the business or whether to nationalise it instead.

A move by administrators to extend their role with the airline to December has raised doubts surrounding the level of buyer interest for the failed regional carrier.

Rex administrators at Ernst and Young said they had received a number of offers from interested parties on June 2 over the sale or capitalisation for the group. The bidding field was narrowed to well-funded parties that saw a future for the company.

The administrators said they had successfully applied to the Federal Court of Australia to extend the voluntary administration of the group to December 2025 with the second creditors’ meeting now on December 5.

But some believe a move to extend the time frame of the sale is not a promising sign.

The government has offered Rex a financial lifeline to keep operating since it collapsed last year.

A deterrent to buyers has been the ageing fleet of Saab 340s, which fly to rural and remote parts of the country, and analysts estimate the costs to be about $190m.

The Australian reported the Albanese government had provided an $80m loan, and bought $50m worth of debt from major creditor PAG Capital to prevent the firm from liquidating Rex. It is now offering an additional $30m.

Since last year when the airline collapsed, various parts of the company have been sold off, including aeromedical business Pel-Air, a 50 per cent stake in National Jet Express and a flight simulator.

The first sale process run by EY failed to attract any serious bids.

Among those believed to be interested are Anchorage Capital Partners and West Australian regional airline Nexus But some question whether the government would gain comfort with Rex being owned by private equity.

Anchorage would buy the airline if it had funding to make a deal financially viable, say sources.

But experts believe selling to a private equity firm would not be the preferred option. First, should the buyout fund get government money to take the asset and then go on to sell it in the years ahead and turn a profit of hundreds of millions, the episode could be embarrassing for the government.

Anchorage Capital was the firm that purchased retailer Dick Smith from Woolworths for $94m in 2012 then went on to float the business in 2014 with a $520m market value, creating about $426m of upside for the private equity firm that held 20 per cent of the stock on listing. Dick Smith collapsed in 2016.

The collapse of private hospital operator Healthscope, which was owned by private equity firm Brookfield, and the collapse of Whyalla, owned by Sanjeev Gupta’s GFG Alliance, would also give the government pause for thought.

Such instances are an example of why the government would need to be selective on who it would allow to own a regional carrier providing essential services.

Private equity firms have also had a history of finding legal loopholes to avoid tax.

DataRoom reported during the sale process last year run by Houlihan Lokey that Oaktree Capital Management, Cerberus Capital and BGH Capital had all previously been in the Rex data room assessing an acquisition.

Rex, chaired by John Sharp, collapsed into administration in July with debts of around $500m, including $130m owed to PAG. A buyer would need to find $300m.

The regional routes Rex operates are profitable, but its undoing came as it tried to compete with Qantas and Virgin by offering services out of capital cities and was unable to compete on price.