12 February 2010

The Travelport IPO Debacle. Investor Payback?

Despite some generous concessions at the last minute by the Travelport team on their feather beds and parachutes and reduction in the initial offer price, the “London deal of the year” has fallen apart and so there is to be no IPO for TP for at least another 6 months probably not now until 2011. A spin and a brave face allowed the announcement of the cancellation as follows: “We will consider bringing it back to the market at a future date, when equity market conditions are more favorable."

I have spoken to several people who have been on the periphery of the deal and spent the last few days chatting with some investment analysts who have familiarity with Travelports IPO Book. Based on these conversations I would like to give some analysis which I hope will put the failed IPO in perspective. I think we have to look at things through three criteria. For this IPO to work – the general economic climate had to be good, IE the market had to receptive to the type of deal, the specifics of Blackstone and its partners in being able to pre-sell the deal and then for the market herd to either accept or not the package. Finally the critical assessment of Travelport – its recent performance, its model and the prognosis need to be microscopically examined.

It was clear that the climate for IPOs has not been great. Greece and Portugal’s troubles are making headline news in the recent weeks. Of the 62 IPOs launched since December 1 2009 globally, 32 were shelved -- 15 in the U.S., 7 in Europe and 10 in Asia.
The global market upswing that was clear from the end of the year in investment confidence has not translated a market for those mega IPO deals that were a hallmark of the early to mid 2000s. We also have to bear in mind that the market is much chastened and is still seeking real value and future growth rather than just cashing put “Venture Vultures”. But the global debt loading that went on last year to save the somewhat broken financial markets has eventually to be paid. So the climate was perhaps something a contributing factor to this failure. If the climate was overall bad then it would have affected other plays. However it wasn’t bad enough to halt everything. Indeed one of Amadeus’s two VC backers managed to get one of their IPOs away this week. Thus the market’s ability to absorb a large deal like Travelport’s IPO reputed to be one of the largest in London this year was still a viable/possible proposition.

For Blackstone in particular, there has been a certain market resentment against the huge debt mountain that they have in their portfolio. The specific failure of Blackstone in the mega PHH deal at the end of 2007 was an early harbinger of the troubles that would beset the VC market for the next 2 years. And some influential people have not forgotten that. Just ask the guys at GE. Boy were they pissed! I do believe that there is a general negativity towards deals that are straight cash outs for the Venture chaps. As one UK fund manager put it: "Investors in the quoted market are not really enthusiastic about being the buyer of last resort for these ‘used’ private equity investments." (Source Reuters). We have to call a spade a spade. Blackstone has already taken its money out so why should the markets reward them for a bad or mistimed early risk. We should remember that over the past several years the Travelport debt has been widely traded and much of that debt has been heavily discounted. In some transactions that discount over face value was a very high number. Thus there is a significant discount already in the market on that debt that Blackstone is seeking to retire. Those debt holders include many of them who are now tertiary or further removed investors. These chaps are in general bottom feeders and hedge funds. For the general market to essentially become the buyer of last resort was in my opinion the biggest single downer factor for the deal itself. The Tamasek deal also set a bar for a concessions and discounts that meant someone would still need to foot the bill. Well it became clear that the traditional money guys were not keen to cover others’ benefits.

Let’s look at the focus of the company and its risks. As I have written previously Travelport has been very aggressive in the market offering deals on both the supply and the distribution side. BTW they are not alone. Within the user community, Travelport has been offering deals of $4 per segment. Thus the market for segment overrides has been really hot from the middle of 2009 until now. Travelport has been crowing about its “Significant Recent Wins”. But on the airline side, Travelport has been offering full content and opt in arrangements that have lowered the gross revenue from segments. That my friends has the smell of something rotten. Lowered gross and raised incentives to customers for the same or falling transaction numbers has to be accounted for sooner or later. While Travelport bills itself "a strong company with an attractive financial model and great momentum, as demonstrated by recent contract wins,” these need to be put into perspective. A cynical person might have a different opinion of who was coining it if ” …The business remains on track to continue delivering outstanding value for its shareholders.” (Reuters). Further in the case of Travelport (as compared to Sabre and Amadeus) a close examination shows they don’t have the strength in the other 3 lines of business. Its investment in the online market space had to be bolstered last year with a cash infusion from TP to Orbitz (Travelport is the largest owner of Orbitz stock). Similarly last year Travelport took a big goodwill write down in their GTA part of the business that has been tanking in recent years. As we know Travelport is the smallest of the big three in the Airline IT space. Indeed in effect it has lost a major customer with the shuttering of Northwest at the end of last month. Thus its tony PARS airline reservation service now has only minor airline customers.

We cannot discount the fact that their core business has risk, clearly the institutional investors saw that and demanded significant concessions and discounts. The emergence of real alternatives to distribution on both the direct side and via new channels represented by Farelogix and Lute amongst others creates a whole series of risks that were not there when Blackstone took Travelport (aka Galileo) off the market. The emergence of Ancillary Revenue as a major importance for the airlines and the general infrastructure demands point to a requirement for significant technology investment spend in the coming years starting almost immediately. This comes at the very time when Travelport had reduced its R&D budget to a fraction of what it once was in absolute and in percentage terms. Travelport also doesn’t have the ability to point to future savings. It already has discounted and implemented those savings from the merger of Galileo and Worldspan. In fact Travelport has some significant inefficiencies as it supports many different hosts: 3 GDSs (Agency Apollo, Galileo and Worldspan) and three separate airline hosts (PARS, Deltamatic and United Apollo) in two data centers. Nor is there any fat in the Travelport organization that will result in magically creating more book value through cost cutting.

So now we know that the deal failed. In future posts I will examine what the future can hold for Travelport. I will also be looking at the impact on Amadeus and Sabre. While they (IE all GDSs) have a good cash flow and there is no immediate risk for the business, the halcyon days of high value for Travelport might just seem not to be here anymore. Happy Days are just not there in Langley, Atlanta or the Blackstone offices. The next effort (if and when it happens) will have to be substantially different. If the same deal was to arrive on desks in say 6 months it will hit the same opposition and same environment. For Tamesek and its proposed part of the package this could also create a long term issue of finding a way to meet the terms of that agreement without essentially robbing Peter to pay Paul. Jeff Clarke and his team clearly have their work cut out for them to salvage something from this wreckage.


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