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"Orbitz
Worldwide" is offering 34,000,000 shares in price range
of $16.00 and $ 18.00 per share; company is a provider of online
travel solutions. On August 23, 2006 Company is acquired by
Travelport, which is owned by Black stone and TCV and pay
$1290 million for 100% stake of the company.
After
current offering Travelport’s net acquisition cost will be
reduced to $235 million for 60% stake in the company ($835
received as capital distribution, $220 received as dividend
and 40% stake offered through this offering)
Net
price paid $235 million ($1290-$835-$220) for 60% stake
(100%-40% = 60%)
Company
earns its revenue from travel-related commissions received for
airline, hotel, car rental and other reservation and
fulfillment services.
Company
intended to use the part of net proceeds to it from this
offering to pay down the remaining intercompany note balance
of $312 million that it owe to Travelport and with rest amount
it intended to pay a dividend to Travelport.
Financials
Company financial year ends on December 31
In
fiscal ended December 31, 2006
company earned revenue of 753 million, operating loss of 12
million and net loss of 91 million (pro forma).
In
Quarter ended March 31, 2006 company
earned revenue of 182 million, operating loss of 8 million and
net loss of 16 million.
In
Quarter ended March 31, 2007 company
earned revenue of 212 million, operating income of 3 million
and net loss of 14 million (pro forma).
For
the years ended December 31, 2004, December 31, 2005, and
December 31, 2006, advertising expense
was $86 million, $224 million, $277 million respectively,
and spent $82 million in Q1 FY 2007 on advertisement.
Company
earns nearly 82% of its revenue from
US market in FY2006.
Company’s
balance sheet is very
weak and it’s cash flow can only fulfill its current needs.
Company/Business
Outlook
Company
shows revenue growth of nearly 10% in FY 2006 as compare to FY
2005 including revenue gain from acquisitions (Company
acquired ebookers plc. On February 28, 2005) and shows loses
at both net and operating level in FY 2006. Despite heavy
spending on advertisements, company's revenue growth in very
slow.
Company's
future growth is dependent
on online travel growth, which is expected to grow at about
25% for next few years due to increase use of online mediums
like websites for travel booking. Although competition is also
expected to intensify in online travel business. The biggest
competition is expected to come from websites directly owned
by individual hotels and airlines that normally offer
discounted prices or other freebies to customers. Over all the
online travel business is expected to grow, so as the
competition.
With
its current financials position, rising
competition, presence of big competitors like "Expedia
Inc.", and despite all this management’s willingness to
pay dividend to current promoters gives very weak outlook for
company’s future.
Valuation/offer
value ($ in million)
(Company may not be able to
perform this well, chances of company performing this well is, one
out of ten)
Assuming
that company shows:
1. 15%
percent rise in revenue year on year in FY 2007 and FY 2008
from $753 in FY 2006 to $865 in FY 2007 and to further
$995 in FY 2008. (Which is more than in present growth rate)
2. Operating
margins at 8% (which so far is negative)
This
leave company with operating profit of $69 and $80 in FY
2007 and 2008 respectively and after detecting interest cost
of nearly $14 and $13 and income tax @ 35% this leave company
with net profit of $ 36 and $ 44, that is EPS of $ 0.43 and $
0.53 for FY 07 and FY 08 respectively.
This
means even if the company perform exceptionally well, at offer
price of $17 company's share is available at one year forward
PE of nearly 40 and two year forward PE of nearly 32 (in
best case scenario)
Whereas
its nearest competitor "Expedia Inc." is available
at PE of nearly 39 and have a much bigger size, very strong
balance sheet and has showed 10% and 50% growth in revenues
and profit respectively in Q1 2007 as compare to Q1 2006.
We rate this IPO 1 on scale of "1 to
5" (5 for best)
Negatives
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First
and the most important thing is that, offer price seems to
be extremely high.
-
Despite
the claims made by company that its operations are highly
efficient, company still works with negative operating
margins.
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Revenue
growth is very slow despite heavy spending on advertisements.
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After
this offering effective per share price paid by Black
stone and TCV to acquire this company will be reduced to
$4.7 per share (after adjusting dividend which will be
paid from funds raised from this offering) and now just
after less then a year of takeover they sees company's
valuation risen by more then three times despite the fact
that there is nothing positive happen with company after
their takeover.
-
Despite
its weak balance sheet management still willing to pay
dividend to present stakeholders.
-
Company’s
balance sheet is very weak.
-
Cash
flows can just fulfill its current needs.
This
article reflects personal view of the author about the company
and one must read offer prospectus and consult its financial
adviser before making
any investment decision
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