Tuesday, July 31, 2007

Flight Centre and PEP: This time it is really over

First Australasian private equity giant Pacific Equity Parnters (PEP) wanted to buy all of Flight Centre. But shareholder Lazard said "No".

Then, PEP and the Flight Centre founders came back fighting with a new proposal to give PEP control of 33% of the business - a proposal that did not need shareholder approval.

Now the word on the street (or stock exchange in this case via e-travel blackboard) is that this deal is also dead. This time the deal died not at the hands of an errant shareholder but at the hands of the founders. Seems the founders commissioned an expert's report from Ernst & Young that valued the company at more than was being offered by PEP. In business stock exchange announcement double speak the Chairman Bruce Brown is quoted as saying
“While the creation of a leveraged joint venture had the potential to deliver significant benefits to FLT and its shareholders, it was also a highly complex and costly transaction, and the value proposition has become considerably less attractive for shareholders as a clearer picture of the costs of the transaction has emerged,”
No idea what that means. This one sentence has those great "stock" phrases "creation of a leveraged joint venture" and "value proposition". Wouldn't we all love it one day to see a Chairman say "the financial terms were crap and we think we can do it better alone".

Regardless of the way they phrased it, I do not believe that Flight Centre can do it alone. As I said before this highly successful business needs a business model rewrite. It needs a clear and unambiguous refocus on Internet distribution. I was asked once how a shareholder would be able to tell that the Flight Centre management was taking the Internet seriously. My answer was a quick and simple one - you will know that Flight Centre "gets it" online when the Chairman announces:
  1. That a new Head of Online has been appointed, reporting directly to the CEO with direct control over all brands online, free reign on how to market and promote those brands and with a fund of money to invest in large acquisitions;
  2. That a target for online sales has been set at [some big number like 20%] of turnover by 2009 (maybe 2010); and
  3. That Flight Centre is embracing the need to be a technology company. Setting up a team of developers (or buying a development shop) devoted to online only activities, reporting to the new Head of Online.
That is - separate online from offline, make online growth the number one target of the business and embrace the geeks needed to make it happen.

If history is a guide this is not the type of announcement we could expect out of Flight Centre under the current management or structure. They will need another private equity deal or other structural shake-up to provide the drive for this change.

UPDATE - News reports are that the PEP is very unhappy with this decision (no surprises). The amazing part from the report is after PEP and Flight Centre working on this deal for what must be more than a year, the SMH is reporting that PEP and its advisers found out that the deal was dead with only 20 minutes notice before Flight Centre send the obituary to the stockmarket.

UPDATE 2 - Am trying to understand the Flight Centre Board machinations that led to this deal being killed by Flight Centre. Specifically - who on the Board was pro the PEP deal and who was against it. From my original post it seemed that the Board was behind Chairman Bruce Brown when he said the deal was a dud. But he update with news reports indicating that PEP has almost no warning of the deal being pulled indicated that there were some senior execs/Board members that were as surprised as PEP was.

A quote from CEO Graham Turner (in August 24 2007 Travel Today quoting an AFR.com report) confuses things even more. He says
"The shareholders have been the big losers in this [the failed bid]...I suspect Iwill be proved right in two or three years when shareholders could have got a serious dividend or buyback as well as retained significant equity in the company."
This indicates that Skroo is unhappy with the failure of the bid and means that Flight Centre's top boss and largest shareholder does not agree with the structure of the company. Weird.


Anonymous said...

You really do have a blind spot when it comes to FC. I'm no supporter or employee but you fundamentally don't understand it because it's not black and white - meanwhile the profits pour in and the corporate business goes from strength to strength. Maybe you're just upset they haven't offered you the gig?

Tim Hughes said...

Thanks for the comment. On the leisure side I will concede a bit of a blind spot but I think it is somewhat justified. They have had plenty of time and warning to prepare for online revolution but had done little. Have openly admitted they are a successful company.

On the profits side. While their top line is growing. 2006 revenues of $975mm against 2005 $870mm, EBITDA is effectively flat growing from $144mm to $147mm. Compare that to the EBITDA growth of Wotif, Expedia, Priceline, Travelocity etc etc etc.

On the corporate side I have said before and will say again that they have been very successful. Here is a post with with the actual the title "Flight Centre - doing it right in corporate travel" on a recent acquisition and here is a post of me being happy client of Fcm.