Affiliates of Elliott Management and Siris Capital Group plan to take Travelport private in the second quarter of 2019 in an all-cash deal with an enterprise value of $4.4 billion. But a lot of questions remain, even after financial documents in connection with the merger were filed late Monday.

Initial investor and analyst reactions were muted. Morningstar’s Dan Wasiolek, a senior equity analyst, described the proposed deal as “unattractive” and “disappointing” for shareholders. Other observers we spoke with echoed that reaction.

The deal isn’t a sure thing. Support from Travelport’s largest shareholders is critical to getting the deal approved. Elliott Management is merely the fourth-largest, with a 5 percent voting rights ownership.

BlackRock holds the largest slice, at 13 percent, Principal Global owns 7 percent, Credit Suisse has 6 percent, and NewSouth Capital Management has 4 percent. Whether these investors like the offer depends on a couple of factors, said a research note from Mark L. Moerdler’s research team at Sanford C. Bernstein & Co.

A central question for large investors is whether they would rather pass on the deal and wait out another year to see if Travelport’s performance improves.

The answer to that partly depends on whether the investors believe management that its recent loss of a contract with travel agency Flight Centre and with one part of Carlson Wagonlit in the U.S. are really transient, one-off issues or if client retention is going to be a recurring headwind, Bernstein research said.

Deal Invites Skepticism

The answer also depends on whether the largest investors like the $4.4 billion price that Elliott Management fetched. The price is just a little more than the $4.3 price private equity firm Blackstone paid for Travelport when services firm Cendant sold the travel technology company in 2006.

Elliott Management itself may be secretly disappointed. The hedge fund arm of Bain considered participating in the buyout, but backed out in November, according to a source familiar with the negotiations. Many Bain alumni work in high ranks at rival company Sabre, and Bain has often hesitated to invest in companies that are third-ranked in market share for their core businesses.

Travelport will invite competitor bids through January 23, 2019. In theory, a strategic acquirer which is a public or private company, might materialize.

“Over time, with a simplified platform and cost structure, Travelport could become a stronger competitor,” said Ellen Keszler, President and CEO of Clear Sky Associates, a travel tech consultancy.

“Travelport has been successful in picking up share in international markets, primarily with smaller agencies, over the past few years,” said Kezsler.

“An improved product development capability could help it regain some lost large customers who have become disenchanted with Travelport’s poor performance on delivering promised product improvements.”

DETERMINING THE VALUE OF THE COMPANIES

Skift research global distribution systems travelport december 2018

The current offer price annoys some investors.

“At $15.75 a share, other Travelport shareholders are getting the short end of the stick,” said Gísli Eyland, who does business development for Iceland-based travel tech company Travelshift.

Morningstar’s Wasiolek noted that the proposed take-private price of $15.75 per share for Travelport is 11 times the company’s expected $1.40 in earnings a share forecast, a multiple that is well below between 18 times and 22 times forward earnings-per-share multiples that investors have paid for peer companies Sabre and Amadeus on average during the past five years.

While Travelport may not be worth as much as its larger peers, the deal suggests that the proposed purchase price may be out of sync with average valuation models for such businesses.

“A large part of this transaction is the debt financing component,” said Seth Borko, a senior analyst at Skift Research. The equity market capitalization of the proposed Travelport buyout deal is $1.991 billion, with a net debt value of about $2.4 billion.

“Travelport has traded at a valuation discount to its two global distribution peers the entire four years it has been a publicly traded company,” Borko noted.

“We believe that discount is in large part because the company has the smallest market share of the three as well as worse earnings before interest, tax, depreciation, and amortization (EBITDA). Travelport’s EBITDA margins were 16.4 percent on average over the last 12 months, compared with 19.3 percent at Sabre and 39.7 percent at Amadeus.”

HOW THE EARNINGS AND DEBT STACK UP

Skift research global distribution systems travelport december 2018

Financial documents in connection with the merger filed Monday confirm the investors plan a tender offer for existing debt.

“So this is basically a full recapitalization with leverage buyout financing in place provided by the private equity shop and Elliott,” said Borko at Skift Research.

The debt matters. Travelport has been the slowest of the three to pay down its debt load partly because its previous private equity owner appeared to handicap it more heavily with a saddle-load of debt that the other peer companies’ former private equity firms did.

So lowball valuation on Travelport may, in part, reflect the fact that debt.

At $4.4 billion, and assuming that all currently outstanding debt is being refinanced, Travelport is being taken private at a 7.2 times multiple to its next 12 months expected EBITDA using analyst consensus from market intelligence firm S&P Capital IQ.

“That is still cheap compared to its peers Amadeus and Sabre, which trade at EBITDA multiples of 13.2 times and 8.4 times, respectively,” Borko noted.

Where’s the Sugar Rush?

Jesse Cohn, a partner and member of the management committee at Elliott Management, led strategy for the activist equity investment campaign against Travelport. Cohn has run more than 30 activist campaigns against tech companies.

Few of the tech deals have resulted in Elliott Management holding a company for day-to-day management for a long time. Most have resulted in sales to other buyers.

Cohn has often targeted companies, including many of the 19 it has targeted this year, with cash piling up on the balance sheets to encourage share buybacks.

However, Travelport already has a dividend program, doesn’t have piles of cash and instead has about $2 billion in debt.

Given that history, Cohn is looking to unlock hidden value. He likely wants to spin out eNett, a fast-growing, high-margin payments division that Travelport has a majority stake in.

Wasiolek of Morningstar estimates eNett might sell for between $1 billion and $1.5 billion. That would represent something of a payback to Elliott and Siris for the $4.4 billion proposed deal.

The price for eNett could vary wildly, especially if global markets enter a downturn by the time it happens.

Selling eNett to its most obvious buyers, Amadeus or Sabre, would shoot itself in the foot. However, large payments providers, like Ayden or Worldpay, may not want to pay a high multiple on eNett’s assumed market value for a platform they may feel they could build on their own.

But would a sale hurt Travelport itself? The eNett payments unit has been a growing, if inconsistent quarter-by-quarter, source of cash and, more importantly, a services cross-selling tool for Travelport.

The Case for Staying Public

Supporters of Travelport’s management argue that the company has made strides that could continue to be built on while remaining public.

Earlier this year, Standard & Poor’s debt monitoring service praised the company for having “reduced its global average search response time” via its agent reservation system and for having “enhanced its mobile booking capabilities.”

Moody’s praised the company’s “diversified customer base with high retention rates and balanced geographical footprint” and its steadily improving “track record of cross-selling airline merchandising solutions, hotel bookings, and other services alongside its core air travel products.”

Travelport itself has said its capital expenditure on its core distribution business has exceeded that of its nearest competitor’s in recent years, making the company a leader in content, merchandising, and technology. For details, see the video of the on-stage interview of CEO and President Gordon Wilson’s appearance in June at Skift’s Tech Forum.

To be clear, Travelport’s management hasn’t spoken publicly about Elliott Management or the buyout and hasn’t criticized it privately to anyone we’ve spoken with. But the management has repeatedly spoken during investor presentations of its belief that it can continue to grow as a public company.

The Case for Going Private

Travelport clearly experienced a difficult time as a private company years ago – there is no denying it. For industry veterans familiar with the painful history of Travelport’s last buyout, the common takeaway is that private equity would be bad for Travelport.

However, history may be a poor guide, some experts argue. Sabre and Amadeus both did incredibly well while owned by private equity.

Travelport’s poor private equity experience may have been complicated by its acquisition of rival Worldspan, another global distribution system provider, but also by the debt load that Blackstone burdened Travelport with.

Elliott and other private equity firms would be unlikely to make a similar mistake.

A private equity investment thesis for Travelport would be to take bolder, longer-term technology bets and heavily invest in the platform. These actions would otherwise be difficult or near impossible as a public company today given shareholder sentiment.

“I would expect [the ultimate private equity owners] to invest to simplify the Travelport platform from three core [reservation] systems and transition all customers onto the surviving platform,” said Keszler. “This will require significant upfront investment but will drive efficiencies and speed to market over time.

The distribution execs at rival technology companies might be intimidated by such a move.

The private equity industry has evolved a lot over the years. Today, it is a highly differentiated industry, according to its fans.

Tech private equity, in particular, has become highly specialized and is becoming an increasingly important part of the broader technology industry.

The reason many technology companies decide it is better to be a private company than a public company is that executives can make bolder bets, invest for the long-term, and avoid the distraction and attention of quarterly public earnings calls.

Private equity firms also often bring deep operational expertise and technology experience that can be additive to a company’s management team and board.

But first, of course, private equity has to get a good price. Given skepticism in some quarters on that issue, the Travelport drama is unlikely to have ended with Monday’s deal proposal.

UPDATE: Story was updated after financial documents were filed Monday evening U.S. time.

Photo Credit: Travelport CEO and President Gordon Wilson, shown here in fall 2014. A $4.4 billion buyout deal for travel technology giant Travelport has met with skepticism among investors. But private equity makes a case for change. Travelport