Travelport – No Appeal In This Leveraged Travel Public Offering (TVPT)

Travelport Worldwide (NYSE:TVPT) is a travel commerce platform which provides distribution, technology, payments and related solutions to the global travel and tourism business.

The company witnessed its public offering past week with shares hovering around their public offering levels. I remain cautious however on the back of the large leverage position, and pro-forma losses following the public offering as the company remains far removed from posting sustainable GAAP earnings, while not displaying that much revenue growth.

Consequently I hold off making an investment at current levels.

The Public Offering

Travelport facilitates travel by connecting providers, including airlines and hotel chains, with both online and offline travel agencies and buyers in the business to business segment in particular.

The company has quite extensive operations having processed some $85 billion in travel spending in the past year. The company has quite diversified operations in terms of geographic regions, while it tries to expand into other services including car rental, rail and even cruises.

The role as a middle man aids travel providers with a greater reach, insight in future volumes and higher yields while buyers benefit from a large offerings and improved efficiency. Of course the global travel and tourism industry is very large, but it is furthermore very competitive and vulnerable to economic conditions. That being said the continued growth in international air travel and international business is a structural growth driver behind anticipated growth going forwards.

Travelport sold 30.0 million shares for $16 apiece, thereby raising $480 million in gross proceeds. All of the shares were sold by the company with no shares being offered by selling shareholders. The pricing implied that shares were sold at the high end of the preliminary $14-$16 price range which has been set by the underwriting syndicate and the firm.

At the public offering price of $16, equity in the business was valued at $1.9 billion based on the assumption of 120.1 million shares outstanding. Shares ended their opening day with modest gains at $16.40 per share, valuing the business at close to $2 billion.

Banks which aided the company in its process to become a public firm were Morgan Stanley, UBS, Credit Suisse, Deutsche Bank, Jefferies and Sanford Bernstein, among a few others.

Valuation

As discussed above, Travelport operates in an attractive industry which is anticipated to show further continued growth. Given the business model, Travelport generates recurring revenue streams, carries no inventory risks and therefore is very asset light, appealing to investors as the company has great diversification in terms of its revenue streams across the globe.

For the year of 2013, Travelport posted sales of $2.08 billion, a 3.7% increase compared to the year before. The company posted a net loss of $206 million for the past year, an improvement versus the $292 million loss reported the year before. Operating earnings did show a meaningful improvement for 2013, with income of $208 million resulting in operating margins of 10%, while adjusted EBITDA came in at $517 million.

The loss on a GAAP basis results from the leverage position as the company paid out $356 million in interest for 2013, while the company incurred $49 million in costs related to the extinguishment of debt.

Improvements on the bottom line were already visible in the first half of this year. Sales rose by 3.5% towards $1.12 billion as operating income rose by $10 million to $135 million. Interest expenses remain high, but fell to $170 million, while the company recorded a $52 million gain related to the sale of shares in Orbitz Worldwide, resulting in a much smaller net loss of $25 million.

Before the offering took place, the company held some $$93 million in cash and equivalents while having some $3.21 billion in debt outstanding, resulting in a net debt position of little over $3.1 billion. This results in an effective cost of debt of around 10-11% at the moment which obviously is quite steep.

Factoring in gross proceeds of some $480 million, and the company could cut the net debt position towards $2.7 billion, avoiding $50 million in annual interest payments, while perhaps refinancing debt at lower rates.

That being said, while the company would make big improvements in terms of the bottom line performance, the company is still very likely to report a net loss even after accounting for the usage of the offering proceeds. This values the business, including debt, at around $4.7 billion which is equivalent to 2.3 times sales, 9 times EBITDA and a non-meaningful earnings multiple given the lack of earnings.

Final Takeaway

I must say that I am not impressed by the offering, despite healthy operating margins. The reason for this dates back to 2006 when the company was acquired by Blackstone in a $4.3 billion deal, saddling the business with debt even accounting for the proceeds from the public offering.

The excessive usage of debt is really my main problem with the business, while revenue growth has not been very impressive as well, in an industry growing much quicker compared to reported revenue growth of the business. Yet the leverage remains the key problem, with the company still being on track to report losses even after accounting for the public offering proceeds.

As such the business is not appealing at all in my eyes. Only unless the business can continue to display a further reduction in leverage, refinance its debt at lower rates or improve operating earnings further so it can become profitable, I remain very cautious.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. (More…)

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