Skift Take

The last thing travel tech giant Travelport needs is to be sold to private equity. It's still digging out from all the debt Blackstone saddled it with. Our best guess is that it will be forced to partly sell eNett, a payments business.

Shares of Travelport surged after U.S. hedge fund Elliott Management revealed it had bought 11.8 percent, or about 14.7 million shares.

After the news on Monday, traders ran up the company’s share price to the highest levels since the months after the company went public in 2014.

Travelport closed Wednesday with a market capitalization of $2 billion, making it fair game for a bid to be taken private by Elliott, estimated to have almost $35 billion of assets under management.

Travelport is one of the three biggest travel distribution technology companies, along with larger rivals Amadeus and Sabre.

Elliott is run by Paul Singer, whom the Financial Times named last month as one of the world’s half-dozen most famous activist investors.

Over more than a decade, Singer has nearly always wrought changes in the companies he has bought into.

A spokesperson for Elliott Management declined to comment.

A Skift Research analysis finds that Elliott has bought stocks with actual voting power worth 6.4 percent of Travelport’s outstanding share volume.

It owns another 5.4 percent of Travelport. But that additional stake lacks voting power because of the structure of the derivatives through which the hedge fund acquired the position.

To outsiders, it may seem odd an investor with only 6.4 percent of voting stock could have such a disproportionate influence on a company’s fate.

Like most public companies, Travelport has many large investors who represent financial institutions, such as index funds and pension funds, which tend to be passive when an activist charges ahead.

In Travelport’s case, anywhere from a quarter to a third of voters is likely to be bystanders, based on reporting from research firm S&P Capital IQ and estimates by Skift Research.

ENett on the Block?

Elliott’s regulatory filing used boilerplate language that said it would keep all options on the table when talking with Travelport’s management and board of directors.

But a few phrases stood out, suggesting that either the sale of payments unit eNett or the outright acquisition of Travelport was high on Elliott’s list of preferred paths.

Elliott said in the filing that Travelport “possesses a fast growing and strategic business in the travel payments industry.” It also said it would push the company to consider the sale of its businesses or assets.

Payments unit eNett accounts for 9 percent of Travelport’s revenues, according to research by investment management firm Bernstein. The unit had 29 percent revenue growth in 2017, to about $200 million. The division has forecast it will achieve “at least 30 percent” growth this year.

While admitting “we do not know what Elliott is going to do,” Bernstein analyst Mark Moerdler said in a research note that the hedge fund might push Travelport to move away from non-core businesses and consider spinning out part or all of eNett.

Selling only a minor portion of the eNett could “be accretive” to the company, Moerdler said. The logic: Travelport’s market valuation doesn’t fully reflect eNett’s value.

Might Elliott’s ambitions be bigger than that, though?

Another phrase that stood out among the boilerplate was that Elliott was interested in talking to Travelport’s management and board about a sale and even participating in such a process as a participant or a purchaser.

Moerdler said his research team expected that Elliott would “potentially look at a leveraged buyout of some or all of Travelport.”

Elliott’s track record offers some clues.

A couple of years ago, Elliott took an 8.1 percent stake in Mentor Graphics, an electronic design automation company, that — like Travelport — was in a market with two other competitors and, like Travelport, had a smaller market share and a smaller market capitalization than its competitors, Cadence and Synopsys.

Elliott prodded Mentor Graphics into a sale. Siemens bought it. And Elliott saw a more than 100 percent gain on the investment stake it had taken.

In late 2017, Elliott nabbed Gigamon, a networking software company, for $1.6 billion, and took it private. That showed it also has the team to handle an outright purchase.

In 2016, Elliott pushed Lifelock, an identity protection company, to put itself up for sale, with Symantec buying it for $2.3 billion. The resulting price premium over its market capitalization netted the hedge fund a significant gain on the more than 7 million shares it had taken.

Not everyone expects such high drama with Travelport, though.

“The Elliott investment might have been made for some activism,” said Dan Wasiolek, senior equity analyst at research group Morningstar. “But based on the language I have read, it appears it was made based on the investment managers view that Travelport was undervalued, at least to some degree.”

Wasiolek agreed with Elliott’s overall view of the travel technology company. “Travelport has made meaningful investment the last several years in its distribution technology platform, and we have seen stabilization in its segments [also known as volumes of passengers boarded] on its platform,” he said.

“Segments grew 1 percent in 2017, after declining 1 percent and 4 percent respectively in 2016 and 2015. So the past investments appear to be helping stabilize prior market share loss [relative to peers Amadeus and Sabre],” Wasiolek said.

Not everyone is as sanguine. Evercore ISI said in a research note this winter that it expected Travelport would face tougher competition from its rivals. The technology company risks having to defend its market share by offering commission discounts to travel agencies and airlines.

Evercore ISI estimated Travelport’s technology investment costs would grow in the near-term at “about 4 percent to 5 percent” a year. That’s neck-and-neck with Travelport’s 5 percent compound annualized growth during the past two years and 4 percent annualized over the past five years.

What’s more, Travelport’s peers Amadeus and Sabre have been averaging higher rates of research and development investment. That means Travelport risks falling behind.

Travelport has more debt than its larger peers Sabre and Amadeus do. Its total liabilities were 106 percent of its total assets, as of the end of 2017. Sabre’s was at 87 percent. Amadeus’s was at 66 percent.

As backstory, private equity group Blackstone bought Travelport for $4.3 billion in 2006.

Blackstone loaded up the company with debt. Then it had to accept a restructuring of the company’s debt by creditors, which meant it gave up some control. Its attempt at launching Travelport back on the public market in 2010 fizzled, but an attempt in 2014 succeeded.

Sabre and Amadeus, who also were in the hands of private equity and got loaded up with debt, have brought down their debt ratios more effectively since Sabre went public in 2014 and Amadeus went public in 2010.

To keep perspective, Travelport has reduced its debt levels to its lowest since 2008 and has strong cash flow.

Another risk: Travelport is not diversified. Unlike its peers, it lacks a hotel software-as-a-service business and a robust airline IT service.

Elliott said in the filing that it believed that Travelport is positioned to retain and grow its market share in the high-margin airline distribution business.

Not everyone agreed with that thesis.

“That category is old news, no growth,” according to Horatio Partners, a tech investment bank with a travel practice. “They’ve had so many opportunities to evolve through M&A of new technologies or organically. Travelport never did. Being acquired might be their only hope of not becoming obsolete.”

Still, Elliott’s investment in Travelport is a vote of confidence in the travel distribution business, which has been around for four decades and has endured.

If it took Travelport private, it would signal faith that the sector will have decades of relevancy to come — despite the effort of airlines, led by Lufthansa and British Airways, to kick the middlemen out of the distribution chain and steal back some of the margin.

What’s Next

Records show that Elliott began buying Travelport stock in late January.

If Elliott follows the typical recent pattern of activist investors, the fund will meet with CEO Gordon Wilson to highlight its plans — if it hasn’t already. Shortly after that meeting, it would most likely send a lengthy proposal for changes to the board of directors.

Deliberations would take an indefinite amount of time, depending on whether CEO Gordon Wilson decides to fall into line with Elliott’s view or chooses to enlist other shareholder allies to resist.

Resistance may be futile. In recent years, technology companies “Qlik Technologies, Riverbed, Informatica, and Compuware all sold to private equity firms after Elliott invested,” noted Reuters.

Elliott’s hard-charging reputation should put CEO Wilson — whom we interviewed last summer in-depth, and who is set to appear on-stage at Skift Tech Forum in June — on guard.

In the firm’s most famous stunt, the hedge fund in 2013 briefly detained a three-masted Argentine clipper ship in Ghana to try to get leverage against the government of Argentina for having defaulted in 2001 on bond payments.


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Tags: gds. global distribution systems, gdss, private equity, travelport

Photo credit: Paul Singer is the force behind Elliott Management, a U.S. activist hedge fund that has taken a stake in Travelport and believes that private equity firms might take the travel technology company private. He spoke about another matter on CNBC in a recent interview. CNBC

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