Investment Group Buys Sato

<B> Investment Group Buys Sato</B>
<I>Acquisition Ends Airline Ownership Of D.C. Agency</I>

By Sarah Welt

<I>Arlington, Va.</I> - SatoTravel this month signed an agreement to be acquired by an investment group comprising Ambassadors International Inc., Stuart Mill Capital Inc. and GE Pension Trust. If all goes according to plan, the deal will close by the end of this week.

The announcement of its new ownership comes after a year of speculation about the fate of the billion-dollar agency, during which it instituted a reorganization plan designed to cut costs by $15 million during a six-month period (<I>BTN,</I> Feb. 23, 1998).

The acquisition of a travel agency by an investment group is an unusual occurrence, but these owners have a long history in travel and call-center management. Ambassadors International president and CEO John Ueberroth said the investment group would like to grow the commercial side of Sato's business and make greater investments in technology, including online booking.

Ueberroth, an investor in online booking provider Internet Travel Network among other things (see sidebar), said Sato's employees were likely thankful that "we are not an existing corporate travel agency that's going to merge and purge a bunch of people."

As an airline-owned agency with a small number of huge government and business accounts, Sato has always been something of an anomaly in the industry, and some said its airline ownership sometimes made it difficult to get the funding it needed. The airlines decided to sell about 18 months ago, and have been seeking a buyer ever since. "It has been an evolving decision as distribution has changed," said Southwest Airlines senior director and Sato board member Richard Sweet. "When you have an ownership group of 11 competitors, it becomes more and more difficult to make decisions."

Now, Ueberroth and Stuart Mill Capital president and chairman Larry Hough will act as Sato's executive committee. The new owners want to target international businesses as well as small and midsized commercial accounts, with the ultimate goal of "looking like any of the six to seven large travel agencies."

Being owned by the airlines meant Sato couldn't do three things: "Market across the full set of commercial customer opportunities, grow through acquisitions and have an international presence," Hough said. It now can "serve a broader base of commercial travel business," including "one of the sectors we can't successfully bid in today, global companies."

In addition to the existing management team, Hough plans to add the executive team he brought from Sallie Mae. "There are a lot of similarities between this business and where we came from," he said, adding that the executive team is "very used to and enthusiastic about the very large commitment Sato has to the federal government."

Asked whether current president and CEO Michael Premo has signed a contract to stay on, Hough said, "I can tell you that in my tenure at Sallie Mae there were no employment contracts. I don't believe in them. People work for me because they enjoy working for me."

Premo, meanwhile, said he "certainly expects to" remain, but "we haven't had detailed discussions with the buying group about what the organization is going to look like in the long term. In the short term, it is business as usual."

Premo said the switch from airline ownership to full ARC-accredited travel agency status will be transparent to customers.

Arlene Englert, manager of employee transportation at St. Paul, Minn.-based 3M Co., said she is "not concerned--we don't anticipate that this will affect our business at all. We've got a contract that runs through 2000 and I don't anticipate any changes." Englert said Sato handles the majority of 3M's $65 million travel spend, and that Premo called her personally to break the news.

Another Sato customer, FedEx managing director of corporate travel Stephen Waring, looks forward to the agency's new technology-savvy ownership. "Sato's been providing us with exceptional service, and I expect that will continue. I think this is a positive for them," said Waring, who in the fall signed a second two-year contract with the agency. "Having ownership other than the airlines will probably allow them to do more, and to continue their work on automated products."

Based in Memphis, FedEx relies on Sato for the 15 percent of its annual $60 million air spend that goes to international travel, and American Express for domestic travel. FedEx now is comparison testing two automated booking systems, AXI from American Express and Trip Manager from Worldspan, its preferred CRS. It plans to add a booking system and a homegrown expense reporting system to its corporate intranet in the coming months.

Waring said it is too late now to reconsider the ITN system based on its ties with Ueberroth. "We looked at ITN early on, but we settled on AXI and Trip Manager as the two systems we wanted to test, quite frankly because of our existing relationships with American Express and Worldspan," he said. "We're not going to change our minds now."

Internally, the change in Sato ownership was greeted with some relief by staffers who feared an acquisition by a rival travel management company. "There would have been a lot more anxiety about another buyer coming in and closing down the headquarters operation or consolidating field offices or field management," Premo said. The new owners, on the other hand, "want to continue to operate the business largely as we've been operating it, to add their own talent and resources, and to grow it."

And having the future of the agency finally settled should help the sales effort. "In the last year and a half, they've really been fighting with one hand tied behind their back," Ueberroth said.

The new owners also want to expand on Sato's existing call-center expertise. It currently has two call centers, in Sterling, Va., and Tukwila, Wash., outside Seattle, plus operations on military bases that function much the same way. "It is an exciting opportunity to move operations, efficiency and current technology in interesting ways to be even more competitive in commercial and military and government sectors," Hough said.

Customers also can conceivably expect to see an emphasis on online booking technology. Ueberroth declined to comment on how, or indeed if, his involvement with ITN will impact Sato's future. But he did say he believes "the Internet is going to play a bigger and bigger role in travel."

While there are no immediate plans to look for additional financing or to take the company public, Ueberroth acknowledged that "someday it could happen."

For now, the owners will focus on the management transition and building Sato's commercial business through organic growth. "We may find opportunities through mergers and acquisitions, but that is not clear at this point," Hough said. If an interesting acquisition should pop up, however, "clearly we will have the capital and management capability" to consider it.