Sabre To Take Control Of Asia Destiny With $411 Million Abacus Buy

Sabre on Thursday signed a definitive agreement to buy for $411 million the 65 percent stake it doesn't already hold in Singapore-based global distribution operator Abacus International.

Sabre in a U.S. Securities and Exchange Commission filing in January tipped plans to make an acquisition of this size and shape, prompting speculation that Abacus was the likely target.

"We can finally talk about our possible transaction," Sabre CEO Tom Klein said Thursday during a conference call with investors.

Full ownership of Abacus enhances Sabre's opportunities in the fast-growing Asia/Pacific region and removes what Klein called the "bureaucracy" and "inefficiencies" of operating under a joint-venture structure. Further, it eliminates the conflicts of interest that arise from Abacus' current ownership by 11 airlines.

More immediately, after closing as soon as July, the deal would shift 100 percent of Abacus' revenue and earnings onto the books of Sabre's global distribution system business.

Abacus already operated as a de facto extension of the Sabre GDS. Their technology is aligned, and Sabre's GDS already processed Abacus transactions. As such, Sabre's market share and other operational metrics already include Abacus air volume.

Where Sabre plans to extract value is via more integrated sales and marketing in the Asia/Pacific region. In short, Sabre thinks it can do better with full ownership.

Abacus holds 39 percent GDS booking share in the region, which this year will be the largest and fastest-growing travel market in the world, according to Sabre.

"We think there are some markets that Abacus is potentially underrepresented," Klein said of the region. "Those markets might not have been as important to some of the owner carriers as their home markets. We do think we can expand our presence and focus more broadly in the region."

While Abacus will operate as part of Sabre Travel Network, Sabre also indicated Abacus' "direct presence" in the region would parlay into airline and hotel IT businesses opportunities.

As part of the deal, signed in Singapore on Thursday, Sabre entered into distribution agreements with the Asian airlines__All Nippon Airways, Cathay Pacific, China Airlines, EVA Airways, Garuda Indonesia, Dragonair, Philippine Airlines, Malaysia Airlines, Royal Brunei Airlines, SilkAir and Singapore Airlines__that are selling their stakes to Sabre.

Those agreements will take effect upon closing, and Klein called them "very long-term contracts" that provide Abacus subscribers the same level of content they have now.

Sabre in financial filings highlighted the potential conflicts with Abacus' airline owners that direct ownership would alleviate. For example, the airlines "may not agree to provide incentive consideration to travel agencies at the same rate as our GDS competitors," noted Sabre in its most recent annual report.

"Subject to some exceptions, we are also prohibited from competing with Abacus by directly or indirectly engaging in the GDS business in Asia, Australia, New Zealand and certain Pacific islands," a Sabre filing noted.

Further, airline owners historically have significant leverage in negotiating booking fees with GDSs in which they have a stake.

Abacus claimed it serves more than 100,000 travel agents in 59 Asia/Pacific markets and brings to Sabre "uniquely local relationships with airlines and hotels," according to a joint announcement.

Sabre especially likes Abacus' position in Greater China. "Sabre will have the leading share in Hong Kong and Taiwan, as well as a meaningful position in the nascent market for global GDS services in mainland China," said Klein.

Klein also noted that Abacus offers regional low-cost and Chinese airline content "that will be additive to Sabre global marketplace."

Sabre thinks it can grow faster and more efficiently in Asia by taking control of sales and marketing.

"This joint venture ran those activities almost at a country level," said Klein. "So, while we love the autonomy of country-level folks who understand customers well and can give us insights into the uniqueness of different markets, we think we have a better go-to market capability than our current competitors."

Direct relationships in the region also will hasten technology deployment, Klein said. "There was a layer between us as the end user of the technology that goes away. We'll have a front-row seat to those customer needs."

Abacus revenue in 2014 rose almost 7 percent year over year to $357.7 million. It posted 2014 net income of $59.4 million, up 40 percent year over year, according to Sabre financial filings.

Sabre expects the transaction to lift its revenue in 2016 by more than $300 million and increase adjusted EBITDA by around $50 million.

Sabre will use around $250 million in cash on hand and borrow $160 million to fund the acquisition. Including advisory and financing costs, Sabre plans to lay out around $500 million.

It expects $10 million in annual cost synergies by 2017. The company plans to integrate Abacus "as rapidly as possible," Sabre CFO Rick Simonson said during the call. Given their close alignment, "we expect technology integration to be relatively straightforward," said Klein.