Download - Capital Structure of Orbitz
Agenda
• Orbitz and the Travel Services Industry• Firm Operating Strategy• Business/Operating Risks• Financial Structure• Competing Firms• Optimizing Capital Structure• Recommendation
page 2
About the Travel Services Industry
This industry comprises businesses primarily engaged in selling, booking and arranging travel, tour and accommodation services to the general public and commercial clients.
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Key US Indicators:Revenue Annual Growth (‘11-’16)
Profit Wages
$21.6bn 1.7%
$992.4m $5.0bn
Industry Tied to Economic Recovery
• Worldwide travel industry large and dynamic with rapid and significant change
• Significantly impacted by prolonged recession 2008-2009 and tight credit markets
• Business travel bouncing back due to higher than anticipated GDP, more robust export and corporate profits in 2010
• US most mature market where bookings have slowed
• Europe, Asia Pacific highly fragmented but growing
United States
Europe Asia Pacific and ROW
54%
37%
21%
Online Travel Industry Penetration Rate
About Orbitz
• Launched in 2001 by group of U.S. airlines• Now 56% owned by Travelport and The
Blackstone Group• Leading global online travel company • Provides customers access to travel
products from over 80,000 suppliers worldwide
• Generates revenue through:– Agency model: similar to traditional travel
agencies, earning fees and commissions from travel suppliers for products/services booked through its website
– Merchant model: fees based on difference consumer pays and negotiated net rate charged by supplier
• #1 in air travel and # 2 online US travel agency
Key Business Activities of the Firm
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Orbitz: Firm Operating Strategy
• Strong portfolio of global brands• One of the most recognized in the US • Difficult for new competitors to create strong online travel
brands given existing marketplace
Powerful Brands
• US brands alone attract 48 million registered users and more than 25 million unique visitors
• Loyal base of repeat customers
Large and Loyal Customer Base
• Most comprehensive set of supplier relationships across all travel categories
• Long-term agreements with suppliers
Broad and Diverse Supplier Relationship
• Track record of pioneering travel technologies that deliver superior user experience and repeat sales
• Moderately heavy investment spending on technology and fulfillment will remain limiting factors to earnings growth
Technology Leadership
• Economies of scale as technology and marketing expenses can be leveraged across brands and geographies
• Structural advantage against new competitors
Economies of Scale
Online Segmentation
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ORBITZ
U.S. full service online travel
agency targeting experience-
driven travelers
CHEAPTICKETS
U.S. full service online travel
agency targeting price-sensitive
travelers
CHEAPTICKETS
U.S. full service online travel
agency targeting price-sensitive
travelers
HOTELCLUB
International hotel-focused online travel
agency
Access to extensive proprietary global hotel
inventory in over 120 countries
with high margins through
affiliation with GTA
EBOOKERS
European full service online
and offline travel agency, targeting
experience-driven travelers
Presence in 13 European countries
Orbitz operates a number of sites targeting specific market segments:
Orbitz Business Overview
Air36%
Hotel27%
Vaca-tion
Packages15%
Ad-vertis-ing & Me-dia7%
Other15%
Total 2010 Revenue by Category
Domestic76%
ROW24%
Total 2010 Revenue by Geography
2010 2009 2008
11,370 9,942 10,615
14%
-6% -2%
Consolidated Gross Book-ings
Gross Bookings % growth
2010 2009 2008
Revenue ($Mil.) 757 738 870
% growth 3% -15% 1%
EBITDA ($Mil.) 142 128 125
% margin 19% 17% 14%
Direct Competitors
The online travel distribution industry consists of few large global players and many smaller regional firms
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0.5 1 1.5 2 2.5 3 3.5
Series3; 758
3,348
3,085
Gross Bookings
Sabre
Direct Competitor Comparison
• Optimal capital structure exists for the investment grade and varies significantly for those in speculative grade.
• Capital structure extremely important at the ‘BBB-’ level given ramifications of falling out of investment grade category. An optimal capital structure would consist of maximizing debt usage (40% debt/capital).
• Financial policy and appetite for risk driver of financing decisions in the ‘B’ category. page 11
The online travel industry is bifurcated into ‘B/B+’ and ‘BBB-’ firms, where firm size is the driving force behind ratings.
Orbitz Sabre Expedia Priceline.com Allegiant Travel
CTrip.com
Corporate Credit Rating B/Neg B/Stable BBB-/Stable BBB-/Stable NR [B+] NR [B+]
Market Cap 238.7 Private 7,480.0 23,350.0 907.3 4,470.0
Revenue 757.5 NA 3,348.1 3,084.9 663.6 499.32
EBITDA 157.6 NA 964.8 909.9 139.6 189.2
EBITDA Interest Coverage 3.4x 3.0x 6.5x 26.2x 55.4 NADebt to EBITDA 3.3x 6.0x 1.9x 0.6x 0.2x 0.0x
Debt to Capitalization 73% NA 40% 22% 9% 0%
FFO to Debt 23.7% NA 41.1% 152.5% 377% NA
S&P Key Industrial Medians to Rating
• OWW key credit metrics closer to ‘BB’ average on most metrics, but its credit profile constrained by non-qualitative factors…its relationship with Travelport and The Blackstone Group.
• The Company’s optimal capital structure relative to other industrials is constrained as Rating Agencies will expect a significant cushion to mitigate governance concerns.
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'B' Average 'BB' Average 'BBB' Average
EBITDA Interest Coverage (x)
1.9 3.9 6.5
Debt to EBITDA (x)
5.3 3.5 2.2
0.51.52.53.54.55.56.5
'B' Average 'BB' Average 'BBB' Average
Debt to Capital-ization
0.759 0.537 0.425
FFO to Debt
0.115 0.224 0.359
5.0%
15.0%
25.0%
35.0%
45.0%
55.0%
65.0%
75.0%
Key Credit HighlightsS
tren
gths
Risks
• Strong global brands with leading industry positions
• Technology leadership• Breadth and diversity of
products and suppliers• Growth potential of hotel and
dynamic package bookings and internationally
• Significant marketing and eCommerce expertise
• Moderate barriers to entry given importance of technology, brand awareness, supplier relationships
• Positive free cash flow
• High leverage compared to industry peers
• Aggressive financial policies• Corporate
carve-out/separation risk with Travelport
• Dependence on highly competitive and seasonal travel industry
Current Capital Structure
Revolving Facility1%
Term Loan50%
Shareholder's Equity48%
• Debt financing approximately 52% of capitalization
• 100% bank debt consisting of $92.5 million revolving credit facility due 2013 and $492 million senior secured term loan due 2014 bearing interest at LIBOR + 300 bps
• Approximately 56% of equity held by Travelport and its affiliates (including The Blackstone Group)
• Cost of debt: 9.0%• Cost of equity: 19.6%• WACC: 12.2%
Key Debt Metrics
2007 (B/Stable) 2008 (B/Neg) 2009 (B/Neg) 2010 (B/Stable)
1.32.1
2.5
3.4
EBITDA/Interest (x)
2007 (B/Stable) 2008 (B/Neg) 2009 (B/Neg) 2010 (B/Stable)
5.94.5 4.3
3.3
Debt/EBITDA (x)
2007 (B/Stable) 2008 (B/Neg) 2009 (B/Neg) 2010 (B/Stable)
3.7%
14.7% 15.5%
23.7%
FFO/debt (%)• Leverage is high but
commensurate with credit profile• Notable improvement in key
metrics • Demonstrated commitment to
debt repayment and improved free cash flow generation
Capacity to Absorb Low-Probability Adversity
2010A 2011E (-20%)
2011E (+10%)
2011E (+20%)
EBITDA 142 114 157 171 Funds from operations 116 93 128 140 Changes in working capital (18) (18) (18) (18)Maintenance level capex (40) (40) (40) (40)Discretionary cash flow 59 35 70 82 Revolver availability 60 60 60 60 Maintenance cash 97 80 80 80
Liquidity 216 175 210 222
• Sources of cash positive even in event of 20% EBITDA decline
• Good banking relationships and access to capital markets
• Capital expenditures largest cash use
• Plus annual prepayment on the Term Loan (50% excess cash flow)
• Minimal maturities over next three years
• Healthy cushion to financial covenants
Optimal Capital Structure
• Online travel industry largely low investment grade (BBB-/Baa3)– Expedia, Priceline.com, Sabre Holdings (Travelocity)– Characterized by moderate financial policies, solid cash flow
generation, high equity component => optimal 25%-35% debt to capital
• Orbitz is the weakest of these publicly rated entities• Capital structure considers moderate growth profile of Company,
aggressive financial policies and ownership structure, access to capital markets
• Existing businesses capable of delivering satisfactory growth, especially in Europe and Asia Pacific
• Complemented with tuck-in acquisitions and continued investment in technology
Optimal Capital Structure (Cont’d)
• Negative returns on capital diminish ability to attract external equity capital; cost of equity will be prohibitively expensive
• Financial policy more consistent with needs of private equity owners
• Debt will remain largest component of capital structure given cost of capital and shareholder return requirements of Travelport and The Blackstone Group (via ‘special dividend’)
• Operating leases play small role in off balance sheet financing given nature of assets
• No underfunded pension or OPEB obligations
Recommendation
• Knowing that Orbitz is not an investment grade company and is owned by private equity sponsors:– Debt to EBITDA is the best measure of leverage– Orbitz should aim for 3.5x-3.75x debt/EBITDA
• Would reduce overall cost of debt• Potentially position for debt rating upgrade• Provided financial flexibility to access public debt markets
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Appendix
Why Optimal Capital Structure is Constrained
‘B-/B3’ Corporate Credit Rating
‘B/B2’ Corporate Credit Rating
‘B+/B1’ Corporate Credit Rating
- 4.5x to 6.75x debt/EBITDA- Debt structure entirely bank debt (term loan plus revolving credit facility)- Significant reliance on free cash flow generation to repay obligations
- 4.0x-4.5x debt/EBITDA- Debt structure entirely bank debt (term loan plus revolving credit facility) at LIBOR + 300 bps- Limited access to public bond market in current capital market environment- Leverage is below average but constrained by ownership structure - Some financial flexibility for additional financing: acquisition related debt capacity of $200 to $250 mil
- 3.5x debt/EBITDA- Would enable Company to access public bond markets with senior unsecured debt rating of ‘B-/B3’ - Capital markets closed to Unsecured Bonds rated below ‘B-/B3’- Debt structure could consist of senior secured bank debt and unsecured bonds- Lowers cost of capital- Enhanced financial flexibility and ability to respond to opportunities
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Assessing Orbitz for Capital Structure
Business Risk Profile
(MODERATE)Financial Risk Profile
(AGGRESSIVE)
Capital Structure and Cash Flow Protection (+)
Financial Flexibility (-)
Profitability (-/+)
Financial Policies (-/+)
Competition (-/+)
Industry Characteristics (+)
Management & Corporate
Governance (-)