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Friday, September 09, 2011

QPR's Lucky Escape: How Close The Mittals Came to Selling Their QPR Shares

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Financial Times/Roger Blitz - Mittal ‘came close to selling QPR stake’

Financial Times/Roger Blitz

Lakshmi Mittal came close to ditching his one-third stake in Queen’s Park Rangers in the summer despite the club’s promotion to the Premier League, according to the steel magnate’s son-in-law who handles the Indian family’s football interests.

Amit Bhatia is now restored as vice-chairman of the west London club that a few years ago was a debt-ridden outfit languishing at the foot of the Championship, which had still managed to attract a clutch of high-profile wealthy individuals around its boardroom table.

Last month, Tony Fernandes, the Malaysian entrepreneur and founder of low-cost airline Air Asia, became the latest such investor, buying out the combined 66 per cent stake of Bernie Ecclestone, the Formula One commercial supremo, and Flavio Briatore, the former F1 team principal .

Mr Fernandes and Mr Bhatia together invested heavily in the summer transfer window to make QPR competitive in the lucrative top-tier of English football. Being a part of the Premier League is “like gold dust”, Mr Bhatia says.

But Mr Bhatia says his summer boardroom battles with the F1 allies caused Mr Mittal to question whether the family’s investment in the financial madhouse of football was worth it.

“We had the conversation when things got very difficult,” says Mr Bhatia, who looks after the family’s financial services interests in the Berkeley Square offices of ArcelorMittal, the global steel group.

Differences in strategy prompted Mr Bhatia to offer to buy up the Ecclestone-Briatore shareholdings, and when it was rejected, he quit the board. “We had to be prepared to let it go,” he says of the family’s 33 per cent stake.

QPR fans have long viewed Mr Mittal as a reluctant owner, his interest only maintained for family reasons. Mr Bhatia, an all-round sportsman who counts the Indian cricket legend Sachin Tendulkar as “a very close friend of mine”, paints a different picture.

“He absolutely knows everything that goes on [at QPR],” he says of his father-in-law. “He is on top of all the decisions made on the board, ticket pricing, budget spending . . . He very much would like to see QPR grow and flourish and develop . . . He looks at the intangibles of what a football club is.”

Yet the Mittals again find themselves having to share their aspirations with other investors. Mr Bhatia does not deny he would have preferred for the Mittals to be sole owner. “My bid was rejected as being too low,” he says. “The bid they accepted wasn’t very far off mine. Maybe they just didn’t want to do business with me.”

For the time being, the Mittals and their new QPR partner, Mr Fernandes, are rubbing along fine, despite a minor difference of opinion aired over the Twittersphere about whether or not to sign up David Beckham, the veteran English footballer. Mr Bhatia is a new Twitter convert, which will enable him to follow the philosophical Tweets of Joey Barton, the most eye-catching of QPR’s 13 new playing recruits.

Mr Bhatia, who runs a hedge fund and a private equity business, is acutely aware of the financial perils of football.

Before their initial investment in QPR in 2007, the Mittals spent time with their friend Roman Abramovich at Stamford Bridge, home of the Russian oligarch’s Chelsea FC. But it was Mike Ashley, owner of retailer Sports Direct and Newcastle United, who has been Mr Bhatia’s most trusted adviser.

“He just gave me tons of his wisdom and taught me the things that he’d learned – everything from how to handle situations to ticket pricing to what kind of contracts players should have and the role of agents,” says Mr Bhatia.

He talks of QPR remaining “financially prudent”, and says the club has an external debt of £5m and loans funded by the shareholders. “We started off first by saying, ‘What do we need this season?’ And then, ‘What will we need for year two and year three if we were to stay up?’ And we’ve stayed well within that, so I think we’re OK.”

The non-playing staff are on incentives based on the money they save the club, while the virtue of the new leadership team of chief executive Phil Beard and Rebecca Caplehorn, the finance director, is that “they have no footballing experience, they’re just good, quality management”.

Mr Beard’s appointment was made with an eye for the future. The former chief executive of the 02, the former Millennium Dome in London’s Greenwich, he is expected to work on QPR’s ambition to move to a new multipurpose stadium. A site at White City in London has been identified.

That is for the long-term, says Mr Bhatia. More immediate is the task of keeping QPR in the Premier League “without throwing large amounts of money at it”.

For the Mittals, QPR is not a trophy asset but a “passion project”, he adds. “It’s not an investment; we’re not hoping to make a lot of money on it. But we’ll find this beautiful happy medium where we can create and build a wonderful club and, hopefully, allow it to be sustainable by our support of it.”

2 of 2
Tony Fernandes, chief executive of AirAsia, is one of the region’s boldest and most successful entrepreneurs. But is his decision to take a stake in lossmaking Malaysian Airline System another masterstroke, or a disastrous mistake? The answer may depend on whether his ego has swamped his business sense.

So far, Mr Fernandes has hardly put a step wrong. As a serial entrepreneur, he has founded no fewer than four airlines – AirAsia, its long-haul affiliate Air­Asia X and joint ventures in Indonesia and Thailand. He is also part-owner, with his business partner, of the privately held Tune Group, which runs hotel, financial services and mobile phone businesses.

When he bought AirAsia through Tune for a token M$1 plus M$40m debt in 2001, it was a failing state-owned regional carrier with two aircraft. It now has more than 100 planes, and has just signed an $18bn deal with Airbus for 200 A320s over 15 years – the third-biggest order in the aircraft maker’s history.

Investors are in no doubt about Mr Fernandes’ Midas touch. The shares have outperformed the global aviation index by more than 100 per cent since AirAsia was floated in 2004. No carrier has bettered its average 57 per cent annual increase in net income. The stock, up almost a third this year before the latest turmoil, was worth $3.6bn before the shares were suspended on Monday. That is more than double the market value of the Malaysian flag-carrier.

Of course, AirAsia benefits from being in the right place at the right time. Its pace of growth is underpinned by the rapid expansion of emerging Asian economies. Average economic growth of about 7 per cent a year is lifting millions more people every year to an economic level at which they can afford a budget airline flight.

But Mr Fernandes is not just grabbing chunks of a growing market. AirAsia has grown consistently, as well as fast, thanks to a rigorous focus on expenses. Costs per passenger kilometre are lower than both Southwest Airlines of the US, which invented the low-cost model, and Ryanair, the Irish group often regarded as the world’s most competitive carrier.

By contrast, state-owned MAS has failed either to adapt to the low-cost era, or to trade effectively as a premium carrier, the strategy pursued (albeit with faltering success) by neighbouring Singapore Airlines. MAS has had to be restructured twice in the past nine years following financial crises, and is now in trouble again, losing $79m in the quarter to March. The second-quarter result, due shortly, is expected to be equally dire.

Angered by the airline’s resistance to change and worried by the looming cost of fleet renewal, the government has given up, forcing MAS to accept a deal, confirmed on Tuesday, under which Tune will take a 20.5 per cent stake in return for a 10 per cent holding in AirAsia. Khazanah Nasional, the sovereign wealth fund that owns MAS, will also buy 10 per cent of unlisted AirAsia X.

For Mr Fernandes, this is a moment to savour. Never shy of self-promotion, he has been hurt and offended over the years by the Malaysian elite, which has largely regarded him as a comic upstart. They laughed when he started in business with two old aircraft and $250,000; they laughed again when he spoke of building AirAsia into the region’s most successful airline, when he launched a Formula One racing team and when he tried to buy an English Premiership football club.

Their laughter has now ceased. But it would be ironic if Mr Fernandes’ moment of recognition turned out to be a millstone round his neck. This is not an inconsiderable risk. The deal was officially characterised as a partnership, but would be better seen as a last-chance rescue. Both earlier restructurings of MAS failed to resolve its underlying problems, and Azman Mokhtar, the head of Khazanah, has spent years putting it through a reform programme, to little effect.

The government hopes the freewheeling Mr Fernandes will provide the missing ingredient. Perhaps he will. But focusing his efforts on the fading flag-carrier would surely divert inordinate amounts of time from running AirAsia and its offshoots, which are soon to be joined by a Tokyo-based joint venture with ANA of Japan. With Singapore-based rival Tiger Airways in trouble – suspended from flying in Australia on safety grounds, and bleeding S$2m a week – this is not the moment for Mr Fernandes to take his eye off the ball.

All the signals are that he will not. Indeed, all the obvious gains will accrue to AirAsia: route rationalisation is likely to favour the lower cost operator, and the deal should reboot government thinking on awarding new routes, on which it has tended to favour MAS. Mr Fernandes will aim to push MAS upmarket, and try to close Firefly, the flag-carrier’s largely domestic budget offshoot, leaving AirAsia with a local monopoly. If he can help MAS recover, he will. But not at AirAsia’s expense. Recognition is sweet. But victory is sweeter.
- Kevin Brown is the FT’s Asia regional correspondent
kevin.brown@ft.com - Financial Times

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