Despegar had offered to pay a premium for Mexico's Best Day in January, but today the two companies are strapped for cash due to the pandemic's destruction of travel bookings. This acquisition may be one of several deals across the sector imperiled by coronavirus.
Events can overtake optimism as shown by the sharp strategy shift since January or Despegar, the largest online travel agency in Latin America.
Despegar’s chief financial officer Alberto Lopez Gaffney said on March 5, “We are very positive, very positive on the year that we’re looking ahead.” At the time, the company was modeling only a mild impact due to the coronavirus pandemic, on the thought that outbound travel from Latin America to Europe and Asia would drop. Executives also continued to tout an acquisition the company had announced in January for Best Day, one of the largest travel agencies in Mexico, for $136 million.
Fast forward to Monday, and Lopez Gaffney told investors during an earnings call that the gross bookings for the online travel agency had contracted during the second half of March by more than 95 percent, year-over-year, by an undisclosed amount. He also said Despegar wanted to exit from the deal or else see significant changes to Best Day’s valuation and the timing of payments. The purchase price had been 17 times Best Day’s earnings before interest, tax, depreciation, and amortization — a measure of profit — of $8 million last year.
On Monday, CEO Damián Scokin acknowledged the “challenging context” of the pandemic but believed his company would survive and emerge stronger. Scokin said the company’s current cash position, with $225.9 million in cash on hand as of March 31. Despegar’s minimal debt obligations, such as no long-term debt and only $17.5 million in short-term debt, will provide it flexibility even if it receives zero revenue for the next year, he said.
During the three months ending March 31, revenues for the Argentina-based Despegar declined 34 percent, year-over-year, on a currency-adjusted basis to $76.1 million. The company’s net income before taxes was a loss of $14.5 million, compared with a gain of $2.6 million in the same period a year earlier.
Despegar’s efforts to respond to the crisis have been similar to online travel companies worldwide. Out of approximately 3,000 workers, Despegar furloughed 387 workers through September, laid off 566 workers, and reduced the working hours of 159 employees.
The company also froze hiring and postponed non-critical investments and expenditures, including ones related to its acquisition of Mexico’s Best Day, to save about $90 million by year-end. It also slashed its marketing to save about $35 million by June.
In dealing with travel cancellations related to the pandemic, Despegar provided vouchers for future travel through March 2020, even for non-refundable purchases when suppliers cooperated. The company has set aside $12.5 million for expected cancelations in the second quarter. For more context, read, “Latin America’s Despegar Wants to Double Bookings by 2025: How Realistic Is That?“
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Photo credit: A view of an obelisk in central Buenos Aires, the capital of Argentina and the home of the online travel agency Despegar. Buenos Aires City Tourist Board