The clock is ticking towards Travelport’s takeover by private equity firms Evergreen Coast Capital and Siris Capital Group.
But this is not a typical private equity, travel sector deal since Evergreen is a division of leading US hedge fund Elliott Management.
Elliott has distinguished itself over several decades as among the world’s most-aggressive hedge funds or ‘activist investors’, meaning its moves are often viewed as hostile by the corporate targets in its sights.
The $4.4 billion deal, announced a fortnight before Christmas, came almost nine months after it emerged Elliott had built an 11.8% stake in Travelport and was pushing the company to explore a sale.
News of Elliott’s stake sent Travelport’s share price soaring to its highest since the company listed in 2014. However, the deal represents a 22% discount on that share price high.
Travelport has until January 23 to solicit alternative offers. It has said nothing since the announcement.
The transaction remains subject to approval by Travelport shareholders – the bulk of which, aside from Elliott, are institutional investors.
News agency Reuters suggested investors “appeared to shrug off the prospect of a higher bid” and the deal is expected to close in the second quarter of this year.
Reuters characterised Travelport as a “stable but relatively slow-growing business” with the “faster-growing payments business, e-Nett, a bright spot”.
In a filing to acknowledge its stake in the company, Elliott noted Travelport “possesses a fast growing and strategic business” in travel payments. It is possible Elliott intends to auction off e-Nett.
Takeover hailed as ‘a good outcome’
Travelport chairman Doug Steenland declared the takeover deal as “a good outcome for Travelport’s shareholders”.
But Travelport’s previous experience in hedge-fund hands was not happy, the company having been owned by the Blackstone Group from 2006 to 2014.
Blackstone acquired Travelport, at the time known as Travel Distribution Services, from Cendant Corporation for $4.3 billion in 2006.
At the time, the group operated solely the Galileo GDS for which Cendant had paid $2.9 billion in 2001.
If the 2006 price seems close to the company’s current valuation that is because it included online travel agencies Orbitz, Cheaptickets and Ebookers in 2006 as well as Gullivers Travel Associates (subsequently GTA, now part of Hotelbeds).
The company rebranded as Travelport in August 2006 and in December announced a deal to acquire GDS Worldspan for $1.4 billion. That deal closed the following year.
Not unlike Elliott, New York-based Blackstone also completed its takeover with a venture capital firm specialising in technology as a partner – California-based Technology Crossover Ventures.
US financial newspaper The Wall Street Journal reported that to complete the takeover: “Blackstone and Technology Crossover Ventures invested $1 billion and borrowed the rest.
“That debt landed on Travelport’s balance sheet.”
On the day Blackstone took over, Travelport chief executive Jeff Clarke told staff: “For most of us, our jobs won’t change.”
The Wall Street Journal reported what happened next: “Two months after the deal closed, scores of employees were lugging boxes of personal belongings to their cars, having lost their jobs.”
Blackstone laid off 10% of the workforce.
Then in March 2007: “Travelport borrowed an additional $1.1 billion and paid it as a dividend to the two firms, returning all the money in just seven months.”
The payment, known as a “dividend recapitalisation”, raised the pressure on costs.
Travelport chief financial officer at the time Mike Rescoe told analysts in May that year: “This is likely one of the quickest returns of invested capital for a private-equity deal of its size.”
Blackstone initially planned to list the company in 2007, on what turned out to be the eve of the financial crisis.
It thought better of that, and then pulled an initial public offering (IPO) a second time in 2010 citing “poor market conditions”.
Blackstone subsequently had to cede control of Travelport to creditors following a series of debt-for-equity swaps.
As of June 2014, Travelport had a net debt of $2.5 billion.
The group finally floated at the third attempt in September 2014, reaching a market capitalisation of $2 billion on its first day of trading.
A specialist in ‘undervalued stock’
Elliott Management specialises, according to the Financial Times, in “recognising potentially undervalued stock”.
The fund is run by Paul Singer, whom the Financial Times (FT) identifies as among the half dozen best-known investors in the world.
In May last year the newspaper described him as “the man giving company executives around the world nightmares”.
Commonly referred to in the financial media as “shareholder activists”, characters such as Singer were previously known as “corporate raiders”.
Typically, they take a stake in a company using borrowed capital “then leverage [the stake] to lobby for change” to increase the return on their investment.
“The most common requests”, the Financial Times reports, “are for a spin-off, a sale of the company, a management shake-up, board seats or restructuring”.
Investors such as Singer have even been categorised as “greenmailers” who “buy stakes in companies and demand some type of pay-off to go away”.
Of course, the Travelport deal has been done in the name of Evergreen Coast Capital, a private-equity affiliate of Elliott Management, and Siris Capital Group.
Evergreen focuses exclusively on technology investments but has made no previous investments in travel. New York-based Siris, founded in 2011, also invests primarily in tech-related businesses in North America and also has no experience in travel.
Yet a glance at Elliott’s recent investment activity gives a flavour of the way the hedge fund behind Evergreen operates.
In December, the FT reported: “This month alone, Elliott emerged with positions at Bayer, the German chemical and drugs conglomerate, and Pernod Ricard, the French spirits group.
“In May it turned up at ThyssenKrupp, the German steelmaker. In July, it seized control of AC Milan, the Italian football club.”
Also in May, Elliott succeed in ousting the board of Telecom Italia.
The FT noted ThyssenKrupp’s outgoing chairman accused Elliott of “psycho terror”.
The French government responded to Elliott’s involvement with Pernod Ricard by calling for major French companies to “have stable and long-term shareholders who are willing to support their development and anchor them in France, so they are not subject to pressure from shareholders who want only short-term financial profitability.”
Mounting concern from investors
However perceived, an investor such as Elliott will urge changes. This sits somewhat uneasily with Travelport’s claim that “it is very much business as usual” following the takeover announcement.
The Financial Times suggested the track record of such ‘activists’ “made some companies more receptive to settling behind closed doors rather than allowing battles to spill into the public arena”.
This is, no doubt, what happened at Travelport leading up to December.
The head of shareholder defence at financial advisory firm Lazard, Jim Rossman, told the Financial Times: “There is no inoculation shot you can get to avoid activism if you’re a major global company.”
Yet Marty Lipton, an advisor at a major New York law firm, also noted: “Shareholders are increasingly concerned about the short-term goals of activist hedge funds undermining the long-term value of their investments.”
Elliott’s involvement could be interpreted as a massive vote of confidence in the GDS sector, of course – as the hedge fund betting on the company’s ability to withstand leading airlines’ attempts to reduce the GDSs’ hold on third-party distribution.
But there are risks. In December, the Financial Times noted “mounting concern from investors about the quality of loans used to finance private equity buyouts”, citing the Travelport deal as an example.
It reported: “Wall Street banks are offloading leveraged loans at discounted prices and demanding borrowers accept less advantageous terms to protect themselves from rapidly weakening demand.
“Bank of America, Deutsche Bank, Macquarie, Credit Suisse and Barclays lobbied for greater leeway when they agreed to finance the $4.4 billion takeover of Travelport.
“The terms agreed give the banks the ability to increase the interest rate on the loan and tighten covenants [binding agreements] if needed.”
The newspaper noted: “While some flexibility is standard in most deals, the amount by which banks can lift the interest rate on the yet-to-be-issued Travelport debt is greater than would have been agreed months earlier.
“There is a lot more market volatility now. A growing chorus of central bank governors, credit-rating agencies and investors have warned of the risks in the leveraged loan market.”
To summarise: the Travelport takeover involves a substantial, leveraged loan in a period of sharp financial tightening – making it somewhat reminiscent of the circumstances surrounding the Blackstone deal.
Privately, it was almost certainly not welcomed by Travelport.