Description

*For background on the GDS industry, the players (Sabre, Amadeus), risks and relevant issues – please see the fantastic writeup on SABR by om730 (01/13/15)

Thesis

·    Travelport is the ‘poor cousin’ (#3 player) in the GDS industry, behind Sabre (SABR) and Amadeus (AMS SM)

·   TVPT is a relatively recent (busted) IPO with a stale ‘short thesis’ (increasing pricing pressures, market share loser), as well as a ‘turnaround’ story of sorts

·    At 4x leverage, TVPT is a ‘public LBO’ as each turn of debt paydown accretes is ~15-20% to equityholders

·  Industry Both industry comparables trade at nearly 2x P/E (SABR 17x; AMS SM 19x) and over 25% FCF premium despite slower growth characteristics

·   The thesis itself is straightforward: Favorable industry tailwinds + attractive valuation + improving fundamentals + continued de-leveraging. In summary, TVPT needs have a full year of clean numbers, continue to de-lever and grow FCF (the ‘SABR’ re-rating playbook)

Description

Travelport is #3 player in the Global Distribution Systems (GDS) industry – behind Sabre and Amadeus – connecting travel suppliers (airlines, hotels, etc.) with travel agencies both online and offline. TVPT itself is a roll-up of several GDS mergers over the past 25 years (see GDS Industry/Travelport timeline). At current levels, I believe Travelport (TVPT) is an incredibly compelling investment with 75-100% over the next 12-18 months.

TVPT is very much a misunderstood technology stock similar to SABR a couple of years ago:

·         Limited and inconsistent sell-side coverage – some technology, some airline/hospitality analysts

·         TVPT historical financials obscured by non-core assets like Orbitz and its IT consulting business

·         PE overhang: Blackstone, Angelo Gordon, TCV

·         Highly leveraged

TVPT remains below its IPO price, so my guess is you’ll get additional secondaries as we approach the IPO price – I believe this is a positive as it will both improve liquidity and get the stock into the right ‘type of investors (vs. current distressed equity/debt PE investors). In other words, credit investors selling down and a shareholder base that increasingly looks like Sabre and Amadeus, while trading towards an industry multiple. At 15x P/E on my 2017 EPS of $1.50 = $22.50/share for ~83% return (vs. SABR @17x and AMS @19x)

GDS Industry/Travelport Timeline

·   1971: Travelport ‘founded’ when United Airlines introduced the Apollo CRS (computerized reservation systems). UA created the Apollo Travel Services division in 1976 and became an independent affiliate 10 years later (1986) – rebranded as Covia.

·     1980s/early 1990s: CRS industry dominated by Apollo (owned by United) and Sabre (owned by American).

·   1987: To counter this dominance, the Galileo Partnership was created in the UK by European airlines: British Airways, KLM and Swissair, together with Covia. Additional airlines later joined, including: Alitalia, Austrian Airlines, Aer Lingus, TAP Air Portugal, Sabena Belgian World Airlines and Olympic Airways.

·   1988: Covia Partnership was formed when United Airlines sold 50% of Covia to USAir (12% of Covia), British Airways, Swissair and KLM Royal Dutch Airlines (together 38% of Covia). Air Canada joined the COVIA partnership in 1989 with its Gemini system eventually integrated into Apollo.

·   1990: WorldSpan was (also) founded to grab CRS market share from the Apollo and Sabre systems – formed in the US by merging the PARS partnership companies (Northwest Airlines and TWA) and DATAS II – a division of Delta Air Lines.

·    1993: Covia acquired Galileo with the merged entity known as Galileo International. Post-merger, Galileo was combined with Apoll – creating the world's first Global Distribution System (GDS).

·     1994-1996: Galileo expanded to Asia (Hong Kong, China and India) and to Canada – through an MOU with Air Canada – to form Galileo Canada.

·   1997: Galileo International was listed on NYSE in one of the largest tech IPOs in US history to date. Galileo bought Apollo Travel Services, Galileo Nederland and TraviSwiss concurrently with its IPO.

·   2001: Cendant Corporation acquired Galileo for ~$3B. For those of you who remember, Cendant was a rollup of business and consumer services with a large travel sector presence.

o   Galileo was rebranded as Cendant Travel Distribution Services, and concurrently acquired Highwire – a developer of internet travel tools and technology for businesses.

o   Cendant continued its travel sector acquisitions:

§  Orbitz (a leading OTA) for ~$1.25B

§  Gulliver’s Travel Associates (provided wholesale services for hotels, destinations, travel packages and group tours)

·    2006: Cendant sold its travel distribution services business, encompassing 20 brands, including: Orbitz, Galileo and Gulliver's Travel Associates – Blackstone Group, Technology Crossover Ventures and to existing/former members of management – for ~$4.3B (Aug. 2006). This newly formed independent travel business services provider was called: Travelport.

·    2007: Travelport acquired WorldSpan for ~$1.4B, and was integrated with into Galileo. At the tame, WorldSpan’s owners were Square Capital and the Ontario Teachers' Pension Plan – earlier acquired it from American Airlines, Delta Air Lines and Northwest Airlines.

o   Worldspan acquisition and its PE ownership left Travelport saddled with very high debt and little R&D investment, resulting in a multi-year period of market share loss – losing out to Amadeus and to a lesser extent, Sabre – both of which had been able to invest in tools for the growting online travel agency (OTA) segment

o   Travelport conducted an IPO of a portion of its ownership in Orbitz (July 2007)

·    2011: Travelport sold Gulliver’s Travel Associates to Kuoni for ~$720mm in order to focus on its core GDS and IT Services business

o   Travelport also executed several debt-for-equity swaps in order to further de-lever the balance sheet

o   Travelport also jettisoned its airline IT business after losing United as a customer – leaving the business open to Amadeus and Sabre

·    2014: Travelport sold its remaining 44% stake in Orbitz. Orbitz had previously agreed to move to a multi-sourcing GDS model starting in 2015 – similar to other industry players; Orbitz was ~7% of TVPT’s revenues at the time.

o   Travelport filed for an IPO in Sept. 2014 and raised ~$480mm to further de-lever the balance sheet; Blackstone owned ~7% post the 2014 IPO

o   Previously, Travelport had attempted to go public in 2010, but it was pulled due to volatility from the European sovereign debt crisis

State Bear Thesis

TVPT screens poorly as a result of its high leverage and ‘messy’ historical financials (interest expense causing negative net income). The good news is this is all in the rear-view mirror in a now very rationale three-player market.

TVPT had owned Orbitz previously, and had the exclusive GDS for them. When the contract expired, Orbitz went from sole-sourced with TVPT to multi-sourced with all three GDS players. Additionally, TVPT sold their IT consulting business to de-lever, while conceding market share to its peers. Again, both headwinds are known and quantified – and in the past. Going forward, you will NOW see the underlying growth in the business that you as well as the FCF inflection and even further de-leveraging – while highlighting the growth of their eNett business (virtual travel cards). Put simply, eNett provides liquidity and working capital to travel agencies by issuing a one-time credit card swipe vs. the current practice to settle with ACH at the end of the month (similar to WEX). eNett is growing and accelerating, and continues to win customers. TVPT owns ~75% of eNett with the last round estimated to be in excess of $700mm valuation (vs. TVPT @$4B EV).

Perceived Risks

·    Weak Competitor: When PE-owned and post-WorldSpan, TVPT was significantly over-leveraged and did not invest in the business – ceding market share to its peers.

·   Orbitz Headwind: TVPT’s share losses continued into 2015 as former subsidiary Orbitz went mult-sourced – a ~$30mm (7%) bookings headwind. TVPT is now maintaining share on stronger pricing in a rationale three-player market.

·   Botched IPO: TVPT missed its numbers out of the gate and had the above mentioned headwinds, but now is focused on its core business and payments growth. I believe its 2016 and beyond guidance may even prove conservative.

·    PE Overhang: TVPT executed a number of debt-for-equity swap prior to the IPO – resulting in debt holders owning equity and ‘forced selling.’ While the stock continues to be owned by some PE debt shops, much of the float is owned by post-IPO investors. Further secondaries will remove the overhang and improve liquidity.

Analyst Day

TVPT hosted its first ever Analyst Day on 12/17/15 – in my mind, this was their ‘coming out’ party – do-over of their IPO roadshow if you will. In summary, TVPT reiterated 2015 and introduced 2016/Long-Term guidance above consensus. While the stock has fallen ~10% since Analyst Day, I believe it can be a very strong performer over the next 12 months, and can re-trace much of the underperformance/bridge the valuation gap vs. peers Sabre and Amadeus.

·     2015: Reiterated guidance/In-line with consensus (despite concerns over recent terrorist incidents)

·     2016: Introduced guidance at or over consensus numbers

o   Guides +6-8% Revs and EBITDA growth (Cons: +7% Revs / +8% EBITDA)

o   Guides +20% EPS growth (no clean consensus #s given differences in tax and interest assumptions)

o   Guides +15-20% FCF growth (implies ~$162mm at midpoint – above consensus)

·   Long-Term: Thru 2020, TVPT sees a combination of solid market share gains in the air business, plus continued outperformance in 'beyond air' (principally strong payments growth with eNett)

o   Guides +7.6% Revs CAGR thru 2020 in the core biz (~94% revs; Cons: ~4-5%) – well ahead

o   Guides $250mm Adj FCF by 2020 (Cons: $180-200mm) – well ahead

o   Goal of $3B in ‘Travel Commerce Platform’ Revs by 2020, with one-third in ‘Beyond Air’

Bottom Line: If TVPT comes anywhere near these numbers, the stock is trading ~6x FCF on the out-year numbers. Also, I am doubly encouraged by the focus on FCF generation and disciplined M&A – if you have followed the industry, this is was the primary reason SABR re-rated.

Valuation

Travelport offers a compelling valuation, given the exposure to the robust GDS end market – and trades on ~1.5x EV/sales, 7x EBITDA, 10x P/E and 9x FCF (2016E) – significant discounts to peers Amadeus and Sabre. With the business's fundamentals improving (market share, price, margins), I believe TVPT will bridge this valuation gap over the next 12-18 months.

Catalyst

• Continued De-leveraging
• Improved Liquidity thru Secondaries
• Hitting Guidance
• Execution, execution, execution