On July 11, Bill Simpson wrote an analysis of Orbitz Worldwide (OWW). In its debut July 20, Orbitz's offering of 34 million shares priced at $15 per share. The company had expected the IPO to price between $16 to $18 per share. Tuesday July 24 the stock closed at $13.90.
The text of Mr. Simpson's original writeup follows:
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Orbitz Worldwide plans on offering 39.1 million shares at a range of $16-$18. Morgan Stanley, Goldman Sachs, JP Morgan and Lehman are lead managing the deal, six other firms co-managing. Post-ipo OWW will have 88 million shares outstanding for a market cap of $1.497 billion on a $17 pricing. IPO proceeds will be going to parent company Travelport, which is essentially Blackstone (BX). It has structured the bulk of these proceeds directed to Blackstone as debt repayment, but it is essentially a nice payday for the Blackstone controlled Travelport.
This is 'round two' for Orbitz. Orbitz initially went public in December of 2003 under the symbol 'ORBZ'. Orbitz's website was originally formed in 1999 (and launched in 2001) by a group of major U.S. airlines including American Airlines, Continental Airlines (CAL), Delta Air Lines (DAL), Northwest Airlines (NWA) and United Air Lines. In 11/04 Orbitz was acquired by Cendant. Cendant combined Orbitz with other online travel sites including cheaptickets.com to form the online segment of Cendant's Travelport. Travelport was then acquired by Blackstone and TCV in 8/06 via a leveraged buyout. Less than a year later, Blackstone is flipping Orbitz Worldwide back onto the public markets. As usual, Blackstone is making out nicely here on the transaction.
Through Travelport, Blackstone will own a 59% stake in OWW post-ipo. As one might imagine through Orbitz leveraged buyout history, there is a bit of debt here post ipo, approximately $600 million. Not nearly as high as many similar leveraged buyout flips back onto the market, but a substantial debt presence nonetheless. In fact since OWW operates in a highly competitive, razor thin margin business, the debt on the books is THE difference here between a bottom line profit and a bottom line loss.
From the prospectus:
We are a leading global online travel company that uses innovative technology to enable leisure and business travelers to research, plan and book a broad range of travel products.
In addition to Orbitz and cheaptickets, assets include ebookers, HotelClub, RatesToGo and the Away Network and corporate travel brands, Orbitz for Business and Travelport for Business.
Air travel is OWW's largest on-line business segment. Other services include the obvious, hotels, rental cars and vacation packages that are customized by travelers. As Orbitz was originally designed and geared as a site for air travel, OWW feels it's currently under penetrated in the non-air online travel market. In 2006 OWW generated approximately $10 billion in worldwide bookers, 87% of which was U.S. based.
Industry - Online travel is the largest e-commerce category. Approximately 47% of travel bookings in the U.S. were booked online in 2006, and worldwide online travel growth grew by 30% in bookings for the year. While the U.S. is by far the largest online travel segment, growth going forward in online travel is expected to be driven by Europe and Asia.
OWW has approximately 25 million unique users monthly and is the second largest online U.S. travel company. Air travel accounts for 70%-75% of revenues annually. With 87% of revenues derived from the U.S. it is not a stretch here to define OWW as an online US air travel booking entity. Yes OWW is branching out from this base via hotel related and non-U.S. focused travel sites, but still the overwhelming majority of revenues are derived from air travel bookings in the U.S.
Risks here are obviously any occurrence that slows U.S. air travel. Also competition is fierce in this space with a myriad of travel booking sites including the U.S. airlines' own websites. A few of the discount carriers such as Southwest (LUV) do not make their fares available for OWW's sites either. Personally, I'm always much more comfortable booking directly from the airline site itself. I utilize sites such as Orbitz to locate fares, then I'll go directly to that airline's website to purchase, bypassing the booking fees that Orbitz and related sites take.
Direct U.S. competitors include Expedia (EXPE), Hotels.com and Hotwire, which are owned by Expedia; Travelocity and lastminute.com as well as the airline sites themselves and a myriad of smaller fare aggregators/bookers. Offline competition includes travel agents and travel professional companies such as Liberty and American Express (AXP).
$600 million in debt, negative book value post-ipo.
2006 - As OWW has made a number of acquisitions, comparing revenues from 2006 to prior periods does not indicate a whole lot. It appears that OWW's organic revenues were up 5%-10% or so for 2006 to $753 million. OWW has something I never like to see in a rather mature company coming public: Operating expenses for 2006 were higher than revenues. So OWW is already in the red before debt servicing charges are added in as 2006 operating margins were negative. Yes, a portion of this is due to depreciation & amortization charges, but really OWW's cash flows for '06 were more or less flat as well. Factoring in debt servicing, OWW lost about $1 per share in 2006.
2007 - OWW had positive operating margins for the first quarter of '07 (just barely), something it did not manage to do in 2006. Revenues were solid in Q1 and it appears OWW may grow revenues to $850-$900 million in 2007, a 16% increase over 2006. Yes, a portion of this is due to acquisitions, and I fully expect OWW to lay on additional debt in the future to continue to acquire smaller travel related websites and operations. I would anticipate OWW to be approximately break-even operationally in 2007, with a bottom line net loss of $0.50 due to debt servicing costs.
Note - OWW has been experiencing the past two quarters lower revenue per transaction. It appears it's getting squeezed a bit on its transaction fees. As I mentioned above, this is a very competitive sector and that will not change going forward.
Conclusion - a quick flip leveraged buy-out related ipo with a negative bottom line. I rarely recommend a leveraged buyout related quick flip ipo. Why? The leveraged buyout entity is essentially sucking out capital to profit itself and that profit usually comes at the expense of the future public shareholders. OWW is an interesting combination of a number of online travel sites, primarily of course Orbitz itself. There is some value here. It is simply not an ipo for me. Orbitz struggled as a public company the first go round after pricing and opening enthusiastically. I'm not certain we need the leveraged quick-flip version of the Orbitz ipo a second time. Pass in range here, I'm simply not interested.