Worldspan's airline owners last week signed an agreement to sell the smallest global distribution system company to Travel Transaction Processing Corp., an entity formed by Citigroup Venture Capital Equity Partners and the private equity arm of Toronto's Ontario Teachers' Pension Plan. Subject to "financing, government and regulatory approvals," Worldspan expects the transaction, which followed more than a year of negotiations, to close midyear.
Terms of the agreement were not disclosed, but substantial risks and other evidence suggest the buyers got a bargain. Scariest for GDS investors is that terrorist attacks, military conflict, airline restructuring and the shift in bookings to GDS alternatives are not the only uncertainties hanging over the industry. A big wild card also is the U.S. Department of Transportation's plans for rewriting the rules under which GDSs operate
(BTN, Dec. 9, 2002).According to Paul Blackney, Worldspan president and CEO, the regulatory proposals were "clearly not central" to the deal. "We looked at the company's viability going forward," said Jim Leech, senior vice president of OTPP's Teachers' Merchant Bank. "Worldspan is particularly well-positioned with a number of online agencies."
Worldspan's backing of Expedia and others propelled it past Galileo in U.S. bookings share in early 2001, months before the launch of another key client, Orbitz. Still, the buyers needed assurance that significant near-term disintermediation of the GDS was not likely.
According to an Expedia document related to its corporate travel service, "Several airlines have approached Expedia Inc. about direct connect, and we are exploring the range of implications involved in pursuing this kind of relationship. We have not agreed to establish direct connections to any air carrier at this time. We value our Worldspan relationship, we think they do great work and provide a valuable service in the distribution chain." Expedia last year expanded on its co-development with Worldspan.
Orbitz, on the other hand, is "moving away from" using Worldspan, said Orbitz vice president and general counsel Gary Doernhoefer at the Masters Program conference last month in Washington, D.C. Nevertheless, Worldspan in late January announced a long-term partnership in which "Worldspan remains Orbitz's preferred technology partner." Since the prior agreement already had been in effect until 2011, sources are speculating on what exactly was "restructured" in the January deal.
Blackney would not be specific about what was at least the third take on the relationship between the two major airline-owned companies that share a few board members. Asked how that arrangement impacted talks leading up to the acquisition, he said, "All of our customers help establish the value of the company. While our strength in e-commerce was not inconsequential, no specific event was involved."
Its Worldspan relationship was one of the items altered in a July 2002 amendment to Orbitz's May registration statement for an initial public offering, which has not commenced. The following statement appeared in the original filing: "Orbitz agrees to process a majority of its GDS bookings through Worldspan." In the amended document, Orbitz replaced "majority" with "51 percent" and added: "Our agreement with Worldspan permits us to process airline bookings using our supplier link technology and our obligations to direct a portion of our bookings through Worldspan do not apply to air segments that are processed using this technology."
The January agreement likely had Orbitz strengthening its "obligations" to Worldspan, possibly by guaranteeing minimum GDS bookings or otherwise limiting the impact of direct airline reservations on Worldspan. Worldspan had good reason to be concerned about Orbitz's supplier-direct development with American, Continental, Northwest and several others, since such bookings generated cost to the GDS in availability queries without the commensurate revenue. It is a particularly vicious microcosm of the yield challenge GDSs face on all online bookings, which have higher costs because they come with more hits to the system than do agent bookings.
"We looked at the fundamentals of the industry and made projections of where margins would be," Leech said. Savings from a voluntary retirement program initiated last year also helped, and some expect the new owners to press for additional efficiencies.
U.S. and Canadian news media cited unnamed or analyst sources with estimates for the value of the deal, in equity and debt, ranging from $750 million to just over $1 billion. When Worldspan competitor Galileo International was acquired by Cendant Corp. in October 2001, the purchase price in stock and cash had fallen to about $1.8 billion from the $2.9 billion estimate made in June of that year. Everybody knows what happened in between, and the drop was a result of the reduction in Cendant shares. Sabre's market capitalization now is a bit less than $2.5 billion.
"We're quite happy," Blackney said. "This allows our current airline owners to monetize their investment and focus their energies on their core business, which is operating airlines. We'll continue to have a very strong relationship with them, particularly Northwest and Delta, as we continue to operate systems for them and get marketing support from them, much as other GDSs continue to get support from their previous airline owners."
That the Delta and Northwest relationships will continue was important to Teachers' Merchant Bank, Leech said.
The heads of Worldspan's three airline owners had discussed the prospects of a sale in interviews with Business Travel News during December and January. "We are looking at opportunities to monetize non-strategic assets," said Leo Mullin, chairman and CEO of Delta Air Lines, which owns 40 percent of Atlanta-based Worldspan. "Worldspan is nice to have, but it is not essential."
AMR Corp. chairman and CEO Don Carty said the company considered cashing out its stake in Worldspan as the best option, "if we can reach a consensus" with the other two co-owners. "We need to find a customer willing to pay the price of the economics we achieve as a Worldspan owner." AA obtained a 26 percent stake when it acquired TWA two years ago.
Though Northwest technologically is most closely tied to Worldspan, CEO Richard Anderson said his company's position was consistent with Delta's and American's: "Worldspan is the heart and lungs of the airline and handles 40 percent to 50 percent of all our IT outsourcing," he said, "but we don't have to own it to obtain strategic value."
The airlines do not anticipate retaining seats on Worldspan's board. The Travel Transaction Processing Corp. is 60 percent owned by Citigroup Venture Capital Equity Partners and 40 percent by the Teachers' Merchant Bank.
That the proposed acquirers are not travel companies offers "a huge vote of confidence in the strength of Worldspan as a company," Blackney said. He added that Worldspan grew revenues and profits in 2002, compared with both 2001 and 2000. Barring unforeseen hiccups, the deal will end years of talks to sell Worldspan with companies that included competitors Amadeus, based in Madrid, and Parsippany, N.J.-based Galileo.
The deal was the fourth major corporate investment this year but the first in the travel industry for the Teachers' Merchant Bank, which has a portfolio of more than $3 billion. Citigroup Venture Capital manages more than $10 billion.