Travelport, owner of the Galileo global distribution system, this morning announced an agreement to purchase privately held rival GDS Worldspan for $1.4 billion and integrate the two GDSs' technological infrastructures and salesforces. The acquisition would boost Galileo's domestic travel distribution standing and end years of industry speculation about Worldspan's future as a stand-alone company.
Travelport CEO Jeff Clarke in a conference call today said the deal should close in the second or third quarter of 2007, pending U.S. and possibly European regulatory approval, and painted the acquisition as key to Travelport's efforts to remain competitive in a changing distribution market.
"We are combining Worldspan's state-of-the-art distribution technology and low-cost infrastructure with Travelport's massive global distribution network," Clarke said. "The combined business will capitalize on certain natural economies of scale, significant operational cost-saving opportunities, synergistic cross-selling opportunities and an expanded global footprint."
Clarke said there will be immediate post-merger potential savings that total approximately $50 million. "From a technology perspective, we believe there are significant synergies in consolidating the infrastructure, the application development, etc," he said. "From a selling perspective, we'll be consolidating salesforces, so you'll have one overall team to deal with. In terms of branding and transition of certain customers, that's all TBD. The integration team will plan as we compete vigorously in the regulatory approval process."
The boards of directors and major shareholders of both companies unanimously approved the acquisition, Clarke said.
Worldspan chairman, president and CEO Rakesh Gangwal will leave the company upon closing but continue to serve in his current role until then, the companies said.
Following a year in which new multi-year agreements with airlines significantly reduced the transaction fees carriers will pay GDSs, Clarke said market conditions require action to maintain Galileo's competitiveness. "Suppliers have been very successful over the past half decade moving their business direct and taking business off GDSs. On top of that, there are new technology entrants in the marketplace. This is a critical move for us to stay competitive in a very robust environment that is being disintermediated by new technologies, as well as faces very difficult competition against our own supplier base."
The deal would have little impact on the recently signed airline agreements, Clarke said. "Both companies have existing contracts which, for the most part, will hold going forward," he said, "but there will be opportunities to meet the need of better products for airline suppliers. For example, today Galileo does not have some of the rapid-reprice capabilities that Worldspan technology has. Search capabilities in Worldspan are very strong. We'd like to add those products to the Galileo family. In turn, Galileo has products, particularly around its international breadth, that are unique to what Worldspan offers today."
News of Worldspan's acquisition surprised few, as for years the company not only flirted with eventually unconsummated mergers with Galileo and GDS competitor Amadeus, but also announced, then canceled, an initial public offering. The company, for now, is fully owned by Worldspan Technologies Inc., which is owned primarily by Citigroup Venture Capital Equity Partners and Ontario Teachers' Pension Plan—which bought the GDS from American, Delta and Northwest airlines in 2003 for $745 million
(BTN, July 1, 2003).
"People have been waiting for this shoe to drop for a long time. The question was who was going to make it drop," said Tom Wilkinson, president of TRW Travel Consulting in Pennington, N.J. "These two GDSs have different platforms. It's unlikely that Travelport would offer two different platforms, so it's more likely it would migrate clients from one to another."
Clarke pointed to Worldspan's platform as an attractive component of the deal. "Worldspan has a very strong technology platform and best-in-class tools targeted in particular to online travel agencies," he said. "Worldspan technology has been recognized as the leading platform for online transaction processing, and they have been able to more than triple their online transactions since 2000. They achieved a low-cost position while launching new and innovative value-added tools. Like Travelport, they have an IT services business hosting reservation systems for Delta and Northwest airlines."
However, Norm Rose, president of Travel Tech Consulting in Belmont, Calif., was critical of Travelport's history of technological integration. "It's interesting that we see further acquisitions from Travelport when they've had problems integrating acquisitions made pre-Blackstone and Cendant, and have continued their problems in the Blackstone era."
Rose predicted Travelport would need "at least a year, if not a couple of years" to resolve all Worldspan integration issues.
The companies also announced an integration planning team, including Travelport chief administrative officer Terry Conley, Travelport chief re-engineering officer Pat Bourke and Worldspan chief financial officer Kevin Mooney.
"This merger builds upon the complementary strengths of our two companies, which will benefit existing and future customers, allowing them to address an increasingly competitive marketplace," Worldspan's Gangwal said. "The combination of Travelport and Worldspan directly addresses industry trends and will provide a new standard of technology, high quality content and world-class customer service."
Rose was critical of Gangwal's nearly four-year term as Worldspan's CEO. "This is someone who took the helm of Worldspan and everything went downhill from there," Rose said. "He stayed the course, but was rewarded because it benefited shareholders. It didn't benefit the travel industry or the company itself."
Some of Worldspan's troubles can be traced to online travel management company Expedia's 2004 decision to diversify its business among GDSs
(BTN, May 10, 2004). Expedia Corporate Travel president Jean-Pierre Remy last month told
BTN, "No GDS today can guarantee full content in the coming months following the deregulations, so we have shifted away from the mono-GDS strategy to make sure we can guarantee full access to our clients. We can connect to three GDSs today: Sabre, Worldspan and Amadeus."
The acquisition, though, would end litigation between Worldspan and Travelport subsidiary Orbitz
(BTN, Oct. 3, 2005), Clarke said. "There are significant legal disputes between Orbitz and Worldspan. When the deal is approved, we will probably drop those lawsuits against ourselves."
The Blackstone Group earlier this year purchased Travelport from Cendant Corp. for approximately $4.3 billion
(BTN, June 30).