ANALYSIS, GDS Part Two: Buying Spree Hits Travel

A buying spree by cash-rich private equity firms is reaching into the travel sector with the proposed buyouts of Sabre Holdings, Harrah's and Qantas, and completed deals for Travelport--now trying to buy Worldspan--Fairmont Hotels & Resorts and Four Seasons Hotels. With billions of dollars more on hand, it's a safe bet that these won't be the last travel acquisition targets. But less clear is the long-term impact of such deals on these companies and the travel sector.

If the deals are concluded, all three U.S. global distribution systems--Sabre, Galileo and Worldspan--would be owned by private equity investors, while Madrid-based Amadeus is owned by both European private equity firms and three airlines.

"The difference between our industry and the others, such as consumer products, being acquired by private equity is that the GDSs are the lifeblood of our industry and if they deteriorate, that will impact us," said Travel Tech Consulting president Norm Rose. "This signals a trend where it's more about the gain than what you do with the company."

But consultant and technology developer Richard Eastman said, "Transaction processing is on its way out. It's not gone, and it won't be for a long time because of dependencies on the legacy host platforms, but as a way forward, it's not where technology is investing monies."

More than 2,700 private equity firms have amassed several billions of dollars from pension funds, university endowments and wealthy investors looking for higher rates of return. Private equity firms last year raised $86.2 billion and posted one-year returns of 32.5 percent in the third quarter of 2005, according to a Red Herring magazine profile on Silver Lake Partners, a firm that, along with Texas Pacific Group, proposed to purchase Sabre. Investment bank Lord Abbett earlier this year said the huge payouts of 40 percent common in the 1980s are about half that today. Regardless of the exact rate, it's clear that returns for private equity firms are consistently higher than the stock market, thus garnering more investment dollars and deals.

Globally, private equity merger and acquisition deals announced this year exceed $3.65 trillion, according to Dealogic, a capital markets solutions firm. Across all industries, the value of acquisitions by private equity firms is on pace to triple this year, according to Thomson Financial. As of Wednesday, private equity firms had announced buyouts in the United States of more than $371 billion, Dealogic told The Beat.

The goal of such deals is to extract a profit in one to five years. This has been achieved by refinancing and paying dividends to the equity owner, but leaving the company with debt; launching an initial public offering for all or part of the company, typically keeping the proceeds; and selling the company after cutting costs, Trends eMagazine reported in a primer titled, "A Private Equity Bubble Is the Next Threat to Your Wealth."

From a financial standpoint, former Travelocity CEO Terry Jones said private equity firms could find ways to unlock the value buried within the GDS companies. "An outside firm can sometimes look at your company differently than you do," said Jones, who left Sabre after it bought back Travelocity in 2002. To pay a 30 percent premium over the last 12-months' stock prices and still expect to make a substantial profit, the private equity firms must see tremendous opportunities, he added, regarding the proposed Sabre buyout.

Sabre executives told employees that they see benefits to private ownership, "including greater flexibility to manage our business with the ability to make decisions even faster. We can also invest with a long-term view rather than managing to short-term Wall Street expectations."

Two separate private equity firms, Silver Lake Partners and Texas Pacific Group, teamed up to bid about $5 billion, including debt, for Sabre Holdings. Silver Lake Partners is "focused solely on making large-scale investments in leading technology companies." The acquisition of Sabre, officials noted, is all about the technology that just happens to be in travel.

Founded in 1999 by four tech-industry friends, Silver Lake Partners expanded in Europe earlier this year. It has been making investments from a second fund that raised $3.6 billion, as well as from its original $2.3 billion fund. Its investment portfolio includes Flextronics, Seagate, SunGard, Thomson and Gartner. The company looks for market leaders "with healthy cash flow, a large customer base, a tested management team, a strong brand, and a division or two with spin-off potential," Silver Lake executives told Red Herring earlier this year.

Sabre certainly fits the bill. Its Travelocity division was public once and founder Jones, now co-founder of the Essential Ideas consultancy, expects the equity firms "to take Travelocity public and make other dramatic cost changes in the company. These are not young, fresh businesses, but they usually throw off a lot of cash," Jones said of the global distribution systems.

Acquisition partner Texas Pacific Group, meanwhile, has been roping in travel entities such as Continental Airlines, America West and Hotwire since it was founded in 1992. Led by David Bonderman, James Coulter and William Price, the Fort Worth-based company has more than $30 billion in assets and raised $14 billion for its buyout fund in 2006, according to Hoover's. TPG's $65 million investment in Continental in 1993 delivered a 9.5 times return. Partnering with Silver Lake Partners, TPG invested $789 million in Seagate Technology LLC five years ago. That investment "multiplied about 8.6 times in value," in what called "one of the most enriching leveraged buyouts in history."

The question is, in their quest to deliver such returns, will the new owners cut costs or invest in new technologies and innovations? Asked about such generalizations, Concur Technologies president and COO Rajeev Singh said, "I wouldn't comment on a stereotype because each deal is unique. But what you have is a group of smart people buying in. Smart investors realize you have to develop value to deliver long-term profits."

To compete globally, the "GDSs need to consolidate," said Prism Group president Michael Whitesage. "They need new and different partners to make that happen. When equity partners come in, you will see the benefit of synergies, but you will see precious little innovation."

"The industry is reconfiguring, and that may lead to differences in how the wires lay, but the business functions will remain the same," Whitesage added. "You need to be able to make a ticket, sell it, process and capture all the data, and you need big robust systems to do all that and warehouse the inventory."

Within travel, analysts also expect to see many more bids by private equity firms for travel technology, travel agency, hotel, airline and related companies. On Wednesday, Texas Pacific Group and partner Macquaire Bank announced that Qantas accepted their $11 billion plan to privatize the oldest and largest Australian airline. Qantas CEO Geoff Dixon even hinted that the deal could help the carrier make a bid for a rival carrier, according to published reports.

The hotel sector, crossing both travel and real estate, has seen plenty of buyouts, with even more proposed. Several groups were vying for gaming and hotel operator Harrah's Entertainment at press time. Four Seasons Hotels Inc. in November announced a $3.7 billion buyout plan from Kingdom Hotels International and Bill Gates' Cascade Investment LLC, with Triples Holdings Ltd. retaining its 10 percent stake. Triples is the family holding company of Four Seasons founder, chairman and CEO Isadore Sharp, while Kingdom is Saudi prince Alwaleed Bin Talal Bin AbdulAziz Alsaud's company. Kingdom also owns Movenpick Hotels.

In May, Kingdom partnered with Colony Capital LLC in a $3.9 billion purchase of Fairmont Hotels & Resorts Inc. In October, Kingdom said it sold part of its minority stake in Fairmont for $12.6 million to the Ontario Municipal Retirement System. It also sold seven of Fairmont's landmark properties across Canada to the pension funds' property arm Oxford Properties for $1.3 billion.

"I see significant interest in the travel supplier space, as well as the travel operator space, continuing on the part of private equity groups," said The McLean Group managing director John Rovani. "There is an enormous amount of money available to be invested. The valuations for private equity groups in this particular sector are surprisingly high ... and much higher than they have been in a long time." In the travel space, Rovani sees most activity in Europe, India and China, but also sees "huge opportunities for new technologies and upstarts."