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Summary

  • Leading technology solutions provider for the global travel industry.
  • Suffers from lack of growth and lack of earnings.
  • Has to deal with the leverage incurred during private-equity ownership.

Sabre (SABR) is a leading technology solutions provider operating in the global travel and tourism industry. Last week the company made its public debut in what has been a disappointment for the firm and its selling shareholders.

Despite the discount I am not eager to pick up shares in Sabre in spite of its leading positions. Lack of growth and earnings combined with a leveraged balance sheet makes this an easy one to avoid.

The Public Offering

Sabre offers its Travel Network businesses through which it is processing hundreds of million of transactions between travel suppliers, airliners, hotels and tour operators with individual buyers.
Its platform is used by roughly 400,000 travel agents to shop, price and book tickets in an efficient manner.

Sabre sold 39.2 million shares for $16 apiece, raising $627 million in gross proceeds. Proceeds raised are reserved for the company with no shares being offered by selling shareholders.

The offering was quite weak. Initially bankers and the firm aimed to sell shares in a $18-$20 price range while offering as many as 44.7 million shares.

Some 16% of the total shares outstanding were offered in the public offering. Trading at $16.66 per share the equity in the business is valued at $4.3 billion.

The major banks that brought the company public were Morgan Stanley, Goldman Sachs, Bank of America/Merrill Lynch and Deutsche Bank.

Valuation

Sabre is effectively a huge clearinghouse of travel fares, schedules and availability of those tickets, tailored to air travel. The company is best known from its Travelocity website, even as it has outsourced most of those operations to Expedia (NASDAQ:EXPE) in 2013.

Sabre's system processed over $100 billion in travel spending and more than a trillion system messages, thanks to its scalable and reliable offerings. The company has created a SaaS-based platform to serve recurring customers with an attractive model.

Revenues for 2012 came in at $3.04 billion which is up by 3.7% on the year before. Net losses rose sharply towards $645.9 million which is mainly the result of $584.4 million in impairment charges. Note that impairment charges appear to be a structural expense as a result of many and expensive acquisitions in recent years.

Revenues for the first nine month of 2013 came in at $2.35 billion, up by merely 0.7% on the year before. Sizable losses of $154.5 million were reported, again on the back of large impairment as well as restructuring charges.

Years of large losses and the buyout by private equity firms TPG and Silver Lake Partners has resulted in a steep debt position. Back in 2006 the private equity partners paid $5 billion for the business resulting in a current debt position of $3.7 billion for Sabra. Against these large liabilities stands merely $500 million in cash while Sabre continues to lose money.

On this debt position Sabre paid $193 million on interest payments in the first three quarters of 2013 alone. This translates in a 7% effective interest rate for the company, so gross proceeds of $627 million from the public offering could save the company some $30 million per annum going forwards. Note that some of the offering proceeds will be used to repay preferred stockholders.

The $4.3 billion equity valuation values the company at roughly 1.4 times annual revenues.

Investment Thesis

As noted above, Sabre has seen a very difficult public offering. Shares were offered at $16 per share, some 15.8% below the midpoint of the preliminary offering range. Despite a very modest jump from the offering price, the offering can hardly be called a success.

Investors are clearly not attracted to this leveraged business. Slow revenue growth and continued losses are not helpful either. While Sabre's global position in the GDS-processed air booking market is impressive it fails to translate this dominant position into cold hard cash.

While the dominant global position appears to be a sweet spot, Sabre acknowledges that one of its major risks to the business is the fee which it receives by offering its SaaS solutions. Besides a changing industry landscape other general risks remain. This includes the prospects for the global travel industry, changes in the travel business distribution model, the financial leverage incurred and past legal claims. Furthermore, the future might bring more goodwill impairment charges like it has done in the past.

Despite the strong current position and the solid prospects for the world travel market I am taking a cautious stance on this offering. Structural changes might impact the business model of Sabre which already suffers from underperforming revenue growth, lack of earnings and a leveraged balance sheet.

I remain very cautious and stay on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Sabre - No Appeal Despite Discounted Public Offering