Orbitz Worldwide (NYSE:OWW) is offering 34,000,000 shares in price range of $16.00 and $ 18.00 per share; the company is a provider of online travel solutions. On August 23, 2006 the company was acquired by Travelport, which is owned by Blackstone (NYSE:BX) and TCV, and paid $1290 million for a 100% stake of the company. After the 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). The net price paid is $235 million ($1290-$835-$220) for a 60% stake (100%-40% = 60%). The company earns its revenue from travel-related commissions received for airline, hotel, car rental and other reservation and fulfillment services.
The company intended to use part of the net proceeds from this offering to pay down the remaining intercompany note balance of $312 million that it owes to Travelport; with the rest it intends to pay a dividend to Travelport.
The company's financial year ends on January 31.
In fiscal ended December 31, 2006, the 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, the company earned revenue of 182 million, operating loss of 8 million and net loss of 16 million.
In Quarter ended March 31, 2007, the 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 expenses were $86 million, $224 million, $277 million respectively, and the company spent $82 million in Q1 FY 2007 on advertisement.
The company earns nearly 82% of its revenue from US market in FY2006.
The company’s balance sheet is very weak and it’s cash flow can only fulfill its current needs.
The company shows revenue growth of nearly 10% in FY 2006 as compared to FY 2005, including revenue gain from acquisitions (the company acquired ebookers plc. on February 28, 2005) and shows loses at both net and operating level in FY 2006. Despite heavy spending on advertisements, the company's revenue growth in very slow.
The company's future growth is dependent on online travel growth, which is expected to grow at about 25% for next few years due to increased use of online mediums like websites for travel booking. Although competition is also expected to intensify in online travel business, the biggest competition is expected to come from websites directly owned by individual hotels and airlines that normally offer discounted prices or other freebies to customers. Overall, the online travel business is expected to grow, and so too the competition.
With its current financial position, rising competition and the presence of big competitors like Expedia Inc. (NASDAQ:EXPE), management’s willingness to pay dividend to current promoters gives a very weak outlook for company’s future.
Valuation/Offer Value ($ in million)
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 then in present growth rate)
2. Operating margins at 8% (which so far is negative)
This leaves the company with an 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 at 35%, this leaves the company with a net profit of $ 36 and $ 44, that is EPS of $ 0.43 and $ 0.53 for FY 07 and FY 08 respectively.
This means that even if the company performs exceptionally well, at an offer price of $17 the company's shares are 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 a current 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.
The company may not be able to perform this well; the chance of the company performing this well is about one out of ten.
We rate this IPO 1 on scale of "1 to 5" (5 for best)
· First and the most important thing is that the offer price seems to be extremely high.
· Despite the claims made by company that its operations are high efficient, the company still works with negative operating margins.
· Revenue growth is very slow despite heavy spending on advertisements.
· After this offering effective per share price paid by Blackstone and TCV to acquire this company will be reduced to $4.8 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 see that the company's valuation has risen by more then three times despite the fact that there is nothing positive happening with company after their takeover.
· Despite its weak balance sheet, management is still willing to pay a dividend to present stakeholders.
· Company’s balance sheet is very weak
· Cash flows can just fulfill its current needs.