Description

EVENT: On Tuesday, February 19, Sabre (TSG) announced its intention to launch a cash tender offer at $23 for the 15mm shares of Travelocity (TVLY) they don't currently own. The $23 price reflected a 19.8% premium to TVLY's closing price the prior Friday and is not conditioned on financing. Sabre further announced the tender would be launched on or about March 5th.

TVLY, in response, issued a press release noting its trailing 30 and 60 day average stock prices were $22.31 and $24.30 respectively, implying the $23 price was at-market, and that they had formed a special committee of independent and outside directors to review and evaluate the TVLY's options and make recommendations to the Board. Additionally, TVLY hired Salomon Smith Barney as its financial advisor.

WHAT DO THEY DO?: TVLY is an on-line travel agent, providing a travel marketing and transaction Internet-based reservations information system. The company is affiliated with more than 700 airlines, 50,000 hotels and 50 car rental companies. TVLY has sold more than 20mm airline tickets and has registered more than 32 million members. Summary financials are as follows for the year ended 12-31-01 ($'s are in millions except for gross bookings, which are in billions).

CY01 CY00
Revenue $302 $201
EBITDA 25 (34)
Gross Bookings 3.1bn 2.5bn

As you'd expect, the full year numbers mask the weakness associated with the 4th quarter resulting from the tragic events of September 11th. For the 4th quarter, summary financials were:

4Q01 4Q00
Revenue $68 $66
EBITDA 8 (7)
Gross Bookings 630mm 696mm

At the $23 bid price, TSG is valuing TVLY at $1.1bn (54mm shares x $23 = $1.2bn, - $114mm in cash, less $0 debt).

BUYER BACKGROUND: In addition to its 70% stake in TVLY, TSG also owns GetThere, a web-based B2B travel reservation system. TSG reported '01 EBITDA of $408mm on $2.1bn of revenue. With 134mm shares outstanding, at the recent price of $43.34, TSG has an equity market capitalization of $5.8bn and pro-forma cash (less TVLY cash of $114mm) of $545mm and debt of $400mm. On an enterprise value / trailing EBITDA basis, TSG is valued at 13.9x.

WHY DOES SABRE WANT TVLY? TSG management is frustrated with TVLY's recent performance relative to its primary competitors Expedia (EXPE) and Priceline (PCLN). Specifically, during the fourth quarter, EXPE's average monthly unique visitors slipped 4.3% sequentially, while TVLY dropped 11.1% sequentially. This is the second quarter in row that EXPE's visitor count has exceeded TVLY's. Secondly, during the fourth quarter, EXPE and PCLN signed up more new booking customers than TVLY for the first time ever. In 4Q01, TVLY added 808,000 booking customers versus EXPE's 870,000 and PCLN's 854,000. Most troubling were the fourth quarter booking customer statistics - TVLY converted only 5.4% of its unique visitors into booking customers (down from 7.9% in the 3rd quarter of '01 and 8.1% a year ago.) EXPE's conversion ratio also deteriorated, falling to 5.2% from 5.5% in the third quarter and 6.0% in the year ago period. Despite the turmoil post 9-11, the TVLY drop in conversions is alarming. TSG management, is likely frustrated with this performance and given the infrastructure associated with its GetThere (B2B travel) site, may think there are synergies to be achieved by combining the operating platforms of these businesses. Further, given the recent USA Networks deal for EXPE, TSG management must be feeling added pressure to resolve the problems at TVLY if they want to remain a viable player.

IS $23 A FAIR PRICE? No - even on a comparable trading basis (using Expedia, Priceline and Hotel Reservations Network as trading comps), the group trades (excluding TVLY) at 25.3x the average '03 consensus . At the current price of $25.71, TVLY is still trading at a slight discount to the comps (based on estimated '03 eps of $1.04). On an EV / 02' EBITDA basis, TVLY is trading 12x (on assumed '02 EBITDA of $105mm off of revenue of $495mm) versus a group average of 18.5x. On an M&A basis, the fair comps are Cendant's (CD) purchase of both Cheap Tickets (CTIX) last August and Galileo (GLC) in June, and the USA Networks deal with Expedia from last July. Forward revenue multiples (EBITDA multiples weren't meaningful) ranged from 2.5x to just over 4 times. At $23, TSG is valuing TVLY at 2.7x forward revenue, which looks light given the fact the TVLY will generate positive EBITDA going forward, is favorably positioned with a membership base of 31.9mm users (the highest in the industry), and was trading $29 in late December.

SO WHY BUY IT HERE? Minority squeeze outs trading at a premium have worked recently - here is a sample of recent successful outcomes:

Bid bump to target
trading level 1
week before the
Target Bidder Original Bid Final Price bump
CSFB Direct CSFB $4.00 $6.00 26%
Unigraphics EDS $27.00 $32.50 3%
Prodigy SBC $5.45 $6.60 7%
TD Waterhouse TD $9.00 $9.50 1%

Rather than look at the bid relative to where the equity was trading prior to the bid, I've assumed you bought the target equity 1 week before the acquiror bumped their original offer price (you bought at a premium to the original bid price). As mentioned above, TVLY has formed a special committee of independent and outside directors to review and evaluate the company's options. It has been reported that the committee is comprised of two members, Kathy Misunas (appointed to the board in December) and Frank Conner (Conner owns approximately 25,000 TVLY shares worth $575,000 at $23). Additionally, director James Hornthal owns 861,376 shares (according to Bloomberg) and is not on the TSG board. Hornthal's stake, worth $20mm at $23, positions him, in conjunction with the independent committee members to fight for a bump from TSG.

CONCLUSION:
1) At $23 this bid looks opportunistic - TVLY was trading in the high 20s as recently as a month ago.
2) TSG's has sufficient financial capacity to support a bump - at $23 for 15mm shares, the purchase price is $345mm. TSG's balance sheet has $546mm of cash (not counting TVLY's cash of $114mm) and they have an undrawn $300mm bank line - each $1 bump in the price only costs TSG $15mm. They've got room to bump.
3) The independent directors own $20mm worth of stock and personally incented to get the best price possible - a high 20s outcome doesn't seem unreasonable.
4) The recent history of minority squeeze outs trading at a premium to the original offer, and the subsequent bumps by bidders to their original offers, suggests TSG will raise its offer to buy the balance of TVLY.

Catalyst

CATALYST - On February 19, Sabre (TSG) announced its intention to launch a cash tender offer at $23 for the balance of Travelocity (TVLY). Sabre currently owns 70% of Travelocity - you're playing for a bump in the price of this minority squeeze out.