Would you buy a used business from the Federal Government?

One of the weird and wonderful side effects of the recent Federal Election was that the Federal Government is now heavily involved in the airline and steel businesses.

The demise of the Whyalla Steelworks early in the election saw both sides of politics promise to do their bit to rescue this smelter and the many thousands of jobs that accompany it.

Politicians love donning a hard hat and Albo is no exception so in this case there was no sign of caution in joining the SA State Government in rescuing a steelworks that had entered administration for the second time with an initial $2.4 billion lifeline.

It was a similar situation for the poorly run and troubled airline Rex which boldly stepped out of its regional roots and started to operate larger jets between the major cities on the eastern seaboard, with dire consequences for its bottom line.

Too important to fail?

Both Whyalla and Rex share the benefit of being highly visible and deeply needed industries on a number of levels.

In the case of Rex, it is literally an aerial lifeline connecting many of Australia’s major regional centres while Whyalla Steelworks fulfil a vital part in national resilience and even in the ability to defend the country from military attack.

What tends to be forgotten when all of this extreme national interest is invoked is that in both instances these were businesses that were really struggling to be profitable.

It cannot really be argued that the Federal Government is in a great position or has any expertise in running these complex businesses but really their role is to stand behind the administrators for a while as they search out new owners for these assets which might be highly nationally significant but are not necessarily attractive to a new buyer.

All is well if the short-term bridge to finding a buyer is successful but things can get harder when the buyers dry up or request large amounts of government assistance to take over these failing businesses.

Serious corporate governance issues

In the case of Rex and Whyalla, both had significant corporate governance issues before they failed.

The corporate regulator, the Australian Securities and Investments Commission, sued Rex for misleading and deceptive conduct and for contravening continuous disclosure obligations.

Similarly, the acquisition of Whyalla by British industrialist Sanjeev Gupta’s GFG Alliance from the hands of administrators in 2017 was viewed very positively but these dreams of a green steel revolution have ended in a very long line of creditors wanting their money back.

There was also the issue of the entanglement of the Gupta businesses in the controversial collapse of supply chain finance firm Greensill Capital, which was used to finance many of their operations.

The Gupta Family Group Alliance (GFG) – the collection of companies headed by Gupta – remains subject to a criminal investigation by the UK Serious Fraud Office (SFO) into suspected fraud linked to the Greensill collapse in 2021.

Collapsing twice in a decade not a good sign

Having collapsed twice in less than a decade, you would have to question whether Whyalla really is viable in its current form or whether it will need some radical surgery to become a successful business.

It is possible that a profitable steel manufacturer like BlueScope could be attracted to buying Whyalla or even a left field buyer like billionaire Kerry Stokes but the terms of such a deal would not make much sense for the incoming owner unless you pushed a lot of the downside restructuring risk back on to taxpayers.

The future for steelmakers looks very cloudy indeed with Donald Trump’s tariffs on China threatening to produce a lot of cheap steel from various countries looking for a new home around the world.

Is there room for a nationalised airline?

As for Rex, the Government has said it will nationalise the airline if a buyer is not found.

There have been some positive signs with the sale of Rex’s aeromedical arm, Pel-Air, to Toll Aviation for $47 million in October last year, the sale of Rex’s shares in FIFO firm National Jet Express (NJE) to former executive chairman Lim Kim Hai and the purchase of its simulator centre by Navinci Group.

However, the Government has already ploughed around $130 million into secured loans to keep Rex Airlines operational during its extended voluntary administration.

That will keep the airline flying to regional and remote communities for a while but the Government must be hoping a buyer can be found given the hurdles and capital and managerial expertise that will be required should the airline be nationalised.