Travelport Gets A Get Out of Jail Free Card. Probation May Be Rather Costly

Travelport at the 11th hour managed to avoid a pre-packaged Chapter 11 restructuring by getting the approval of all of its Lien Holders on its PIK to allow the $715 million PIK to be repaid by December 2016 instead of March 2012.

However the price is going to be very high. A quick flip through the issues now confronting Travelport Holdings (Parent company to Travelport Inc) are as follows:

1. There is a large group of unhappy bondholders.  A group representing 25% of the bond holders filed on September 23rd a formal complaint to the company which was then submitted in regulatory filings to the SEC.
2. Travelport is now paying a 2011 record interest rate of approx 13% to the lien holders for the revised debt swap however this is a somewhat fictitious amount as the agreement allows the company to use debt rather than cash to pay the dividends.
3. Travelport's ability to raise funds for new activities will now be limited.
4. Travelport may have restructured its immediate debt but it is still creaking under a very heavy debt burden that would discourage any IPO offering.

The level of machinations required to complete the transaction is almost mind-boggling. I have waded through the SEC filings along with analysts briefing on the topic. In my view the long term financial health of the company will be in doubt irrespective of its actual performance. It still has to restructure the overall debt to remain in compliance with the obligations of the different forms of the debt. It has already sounded warning bells of the loss of the United Airlines (Apollo) Hosting contract that must end before April 2012. There are other issues that face the company.

It seems I am not alone in my concern about the [parent company's (Travelport Holdings) health.

The unhappy note holders representing 25% of the outstanding PIK hired Dewey & LeBoeuf to denounce the restructuring. In their September 22nd letter to the company they stated  “The noteholders demand that Holdings (parent company) and its affiliates (presumably including Blackstone)  cease and desist from taking any steps to document or consummate the restructuring,”Their efforts failed. So highly likely there was some smoky backroom deal was made but the resentment is still there. This letter found its way to filings to the SEC the following day.

The initial PIK loan, from the early days of March 2007, was used to finance a dividend to Blackstone and affiliated equity owners, according to the September 22nd letter.  And this has been a pattern all along for Blackstone to cover its own position preferentially at the expense of the other debt holders. Remember that when the original deal to acquire Cendant was done in 2006 - Blackstone was a private company. Today following its IPO it falls under a much tighter regulatory environment.

Travelport Holdings bond values have been falling for some time. Since August the value of the bonds has plummeted over 40 %. Two of the debt rating agencies downgraded the debt first Moody's on 16th August then S&P earlier this month on 13th Sept. This came after the first warning was fired by S&P in February of this year with a caution. By September 23rd the yield on the bonds was 39%, The company’s $247.2 million of 11.875 percent senior unsecured bonds due September 2016 rose 3 cents to 42.5 cents on the dollar that morning and has been very volatile since then. When trading starts again this morning with the immediate debt crisis over - the bonds will likely settle down. That discount shows just how far the debt value has fallen since the notes were first issued in 2007. There is a large amount of this debt out there in the market. There has been a significant amount of trading going on in this debt especially during the last 9 months. 

Long term - this is unhealthy.

Cheers

NOTE Thanks to Bloomberg and the Debt agencies for the information in this story. Thank goodness we have EDGAR to help us navigate the maze of SEC filings.

MakeMyTrip Pops a Big One - Travel Is Hot Again

Ah yeah baby...

Travel is HOT HOT HOT.

The 89% first day pop on Indian OTA Make My Trip should give a lot of people confidence that travel is back and back big time. In what the Motley Fool called one of the hottest in years... there is a lot for the industry to smile about.

So let's see - is this just the consumer market or is there good stuff that can occur elsewhere in Travel Technology?

In my view this should give the Gnomes of Langley and Atlanta some comfort as they struggle to find ways to put a little lipstick on the porcine Travelport. For Sabre this will undoubtedly revive the debate as to whether they go wholly out as an entity or if they go down the Blackstone path and push Travelocity out separately. While Travelocity is a great property - it has lost its luster like any of the big four with the notable exception of Priceline.

Cheers

Travelport to Announce IPO Soon?

Ok the rumours are already flying... Travelport will make its announcement probably this week with their Q2 results. The announcement will come if its going to during the results call, scheduled for Thursday August 5th at 11AM EST.

In the past few days it has been ramping up its PR as a way to get some positive news into the market. This morning's mail box revealed a mailer for Travel Agents trumpeting the Continental Full Content Extension and on the website UA and TP announced their extension.

All this points to the announcement on Thursday. It first surfaced as a rumour on June 25th after the rather embarrassing pull back of its initial offering in London earlier this year. Amadeus got away nicely in Madrid so the stars should be aligned for Travelport.

Or maybe not...

Travelport still has some significant challenges. UDT - its star new product also called Universal Desktop now nearly 3 years late in deployment is not there yet. Early adopters trying to implement additional content are finding the interface and the data structures challenging. Its airline hosting business fails to excite and this is an essential part of a long term survival strategy for the core reservations based business. Its Orbitz partner/sibling/customer is also not setting the world on fire being squeezed out by the rise of Priceline.

The spin meisters will be working overtime to make the animal look good. But the investor community remains guarded. Enthusiasm for the deal was decidedly less than stellar with a strong set of issues on multiple levels that caused the collapse at the Feb 2010 IPO attempt in London. The fundementals of these issues have not gone away. The City Gnomes are not known for their forgiveness nor short term memory loss.

Greece (one of the reasons cited for the pull back) is just as sick if not worse. The retail climate is not as hot - retail sales failed to ignite the US market. But the investment climate is definitely better in the USA. Is that enough?

For investors who are still very weary of get rich quick schemes - they will be looking hard at what Travelport intends to do with the proceeds. If they are going for just debt retirement that will not be viewed positively. Savvy followers of the sector realize that there is a growing investment curve driven by the needs of the market for distribution of the unbundled airline products. Travelport has several areas that need investment such as its fare products as well as support of ancillaries. These are not trivial investments. With little airline reservation revenue supporting it - Travelport faces challenges.

Also worrying must be the amount of incentives and the resulting pressures on yields from increased marketing costs which are long term in nature. This was already highlighted in the Q1 results. The ability of some airlines to drive lower costs from their "Full Content" deals means that Travelport is more vulnerable to distribution pressures than Amadeus and Sabre are.

Of course the emergence of Google/ITA and new players such as Everbread in fare search systems challenge at a core level the concept of the legacy GDS that is the centerpiece of Travelport's business.

Travelport is therefore a riskier investment than its class members.

So this is definitely a story that will be interesting to watch. Let's see if the Professor is right.

Cheers

AA To Mandate 100% Direct Distribution

And so it comes to pass.

The first Full Service Network Carrier to come to the market and advocate a complete break from the traditional GDS based model. AA's Cory Garner announced this week that AMR's airline subsidiaries will move to 100% direct distribution.

Max Hopper must be spinning in his retirement home with this one. AMR and its former child Sabre have finally come to break apart. In less than 60 days AMR has broken the chains that bind that seemed so formidable back in the 80s and 90s.

On August 29th they announced they were bailing out of Sabre's hosting. And earlier this week at CASMA they announced they were bailing out of the GDS model that Sabre used to dominate.

There can be no simple words to describe this fundamental shift in AA's position. We should note that this has not been a sudden decision but a long term progression as the former child moved slowly but inevitably towards conflict with its parent.

So now you have it. Two of the World's premier carriers have now clearly laid out their opposition to the GDS holistic one size fits all model. AA and LH - via different methods have defined the new world order.

Of course this could not have come at a worse time with the GDSs primping themselves for IPO. Now two of the largest content providers have created opposition to the very business model that they are hoping to take to the IPO market.

The WOW team and Sabres joint investors (TPG and Silverlake) must not be happy bunnies this weekend. Needless to say Blackstone must also be a tad PO'd.

You gotta love this business. It is NEVER dull.

Cheers

Travelport CEO tops pay chart @$43 million

Jeff Clarke headed the poll of Private Equity sponsored companies in a recent poll by PE Hub.

Here is the list and the comparisons.

The CEO Salaries of the Five Largest Take-Privates of 2006:

Jeff Clarke, President and CEO, Travelport
Sponsor: Blackstone Group
Total compensation: $42.6 million

Michel Mayer, Chairman & CEO, Freescale Semiconductor
Sponsor: Blackstone Group, Carlyle Group, Permira, TPG
Total compensation: $19.03 million

David Calhoun, CEO, Neilson Co.
Sponsor: Blackstone Group, Carlyle Group, KKR
Total compensation: $18.71 million

William F. Aldinger III, President, CEO and Director, Capmark (formerly known as GMAC Commercial Holding Corp)
Sponsor: KKR, Five Mile Capital Partners, Goldman Sachs Capital Partners
Total compensation: $8.28 million

Eric Feldstein, CEO, GMAC
Sponsor: Cerberus Capital management, Citigroup, Aozora Bank
Total compensation: $3.63 million<–>

Perhaps I should have stayed at Worldspan!

Cheers and thanks to Professor Stuart for sending me this one.

Oops - Blackstone hits snag in pursuit of Worldspan

The EU has decided that it has "serious concerns" which will place the Blackstone/Travelport acquisition of Worldspan under the microscope. Frankly this should be a non-event. The total market for reservations services is not that great. So the scope of the review seems somewhat out of whack with the general industry view.

However - it may be that this is an indication from the EU of how they view GDS deregulation although that would be a stretch since a different group inside the EU is looking at the issue - Transportation (Jacques Barrot) vs the DG on Competition (yes Neelie Kroes's group) who are looking at this merger.

The story so far is that - On 23 March 2007, the Commission received a notification of a proposed concentration pursuant to Article 4 and following a referral pursuant to Article 4(5) of Council Regulation (EC) No 139/2004 (1) by which the undertaking Travelport Inc. (‘Travelport’ USA) a subsidiary of The Blackstone Group (‘Blackstone’ USA) acquires within the meaning of Article 3(1)(b) of the Council Regulation control of the whole of Worldspan Technologies Inc. (‘Worldspan’ USA) by way of purchase of shares.
On March 30th it issued a 10 day notice for comment. That has now been done and yes they feel there will be concentratio which opens the docket for a deep investigation. This can take up to a year.

So what's going to happen? The options for WSP and Galileo are not pretty. So they will probably have to go through the erosion of marketshare and the collapse of WSP's US and EU business or seek an expedited review. With Rakesh and crew mentally checking out - this will be hard on the rank and file.

The chaps in Axis House and at the Galleria are probably longing for the Halcyon days of Roy Burnham and Neil Beck.

Stay tuned. This one is going to run for a while.

Cheers

Timothy

PS disclosure - I was Head of International Technology for Worldspan from 1990-1996 based in London.

Pegs and Wizcom - Last Gasp II

Yes folks the old models are dropping like flies. In my humble opinion, here is another one that will soon be biting the dust...

Pegasus - whose CEO was once called a very derogatory name in public by one of his big customers - has JUST managed to scrape through and get enough cash in the till with a recent offering. Not wishing to even hide their intent on cashing out - the current investors made it very clear they wanted the cash for themselves - oh yes and to buy out Wizcom from Blackstone. This they have managed to do.

But life isn’t so rosy. Pegasus revenues have been falling for some time. Its customers and suppliers are defecting and its business is not as relevant as it once was.

I feel very strongly that despite the underlying trend of disintermediation the team at Pegasus made a mistake many years ago when they didnt develop a solution for Wide Area Availability (aka Availability Search). Hoping to capitalize on what was then a monopoly - they refused to address the question. Well now they will pay the piper.

Their relevance is no longer as strong as fragmentation and bypass are the order of the day. Pegs can no longer rely on the GDSs nor their supply side partners.

I would like to put to rest one awful truth out there about the GDS being a higher yield market for Hotels. While this is technically true it comes at a price:

1. The product/content served up is pretty poor.
2. The technology sucks.
3. Travel Agents are in the main lazy and don’t look hard if the product is not available easily via the GDS.

Consequently the premium paid by users for hotels booked via the GDS Travel Agency (TMC type) bookings versus those booked using Pegasus linked to say and OTA such as Expedia has been of the order 20%+ (source TravelClick). But this is an unnatural act. In today's tight market for product (with occupancy levels at historic highs) this is unsustainable. The hoteliers got VERY smart in recent years and manage now to have the upper hand. Pegasus is largely irrelevant and their total share of the market is falling.

As bypass of different types occurs and fragmentation is the order of the day it is not just Pegs Switch business that suffers but the other pieces also. The rep business has seen significant erosion due to new players at cheaper rates and better services/technologies emerge.

Even the HCC business is coming under fire - without the ubiquity of the Switch carrying all Travel intermediary business - the value of the switch based HCC counting falls away. Perot is the beneficiary of this.

So good luck to Mike and John as the struggle to hold on to the business. There are already more holes in the dyke than you have fingers...

Cheers

Timothy