There are all sorts of complicated financial maneuverings playing themselves out, with Travelport Holdings saying a Chapter 11 declaration, if it occurs, would have minimal impact on Travelport Ltd. — that is, Travelport GDS, its airline IT business and its 48% holdings in Orbitz Worldwide.
Any fallout, should a bankruptcy filing occur, remains to be seen, but it certainly wouldn’t be good news as Travelport tried and missed in an IPO attempt¬†in 2010 and the operating company continues to struggle under acute debt burdens of its own.
Several credit agencies have downgraded Travelport’s debt amidst concerns about the company’s outlook.
A good portion of this ordeal can be traced to the private equity acquisition of Travelport from Cendant by The Blackstone Group, Technology Crossover Ventures and One Equity Partners¬†(JP Morgan Chase) in 2006.
The story of how Travelport and Orbitz Worldwide have become weighed down with inordinate debt burdens has been written about frequently, but Will Ashworth provides a nice update in InvestorPlace.
Blackstone and its partners bought Travelport for $4.3 billion¬†¬†in 2006, using just $900 million of their own cash and financing the rest, Ashworth relates.
And, as has been well-documented, Blackstone turned around and almost immediately paid back its investors by borrowing and paying itself a dividend through a $1.1 billion payment-in-kind (PIK) loan, which it burdened Travelport Holdings with.
The PIK loan sort of turned the traditional private equity dynamic on its head. Instead of waiting five years or so to flip the company and profit on its investment, Blackstone recouped much of its monies in the first few months.
Some would say this is a tale of the interests of private equity owners being at odds with the well-being of the company it acquires.
The $715 million that Travelport Holdings is trying to refinance is what’s left of the $1.1 billion PIK loan made in 2006.
And, all of that is just parent company Travelport Holdings’ debt.
The operating company, Travelport Ltd., has an additional $3.2 billion in debt to deal with, Ashworth says.
All of this red ink was a major factor in Travelport coming up short and withdrawing its IPO try in early 2010.
So there is $715 in debt remaining five years after executing the $1.1 billion PIK loan and that is what is at issue this week in Travelport Holdings’ attempted restructuring of it through 2016 and the potential bankruptcy filing.
As anyone knows from their own personal budgets, if your mortgage and credit card payments are off the charts, you’ve got cut back elsewhere in an attempt to keep it all together.
So Travelport, which saw its GDS segments fall to 28% of total GDS segments in 2010, has been hamstrung in its maneuverings by its high leverage.
You can point to all sorts of other factors weighing on Travelport, too — Worldspan’s loss of the Expedia contract; disruption caused by altering its relationship with third-party marketing partners in the Middle East; ¬†the looming loss of the United Airlines reservations platform, and the economic downturn.
But there is no doubt that the debt squeeze foisted upon Travelport by its private equity owners has worked to the detriment of the company.
Ashworth also points to Blackstone’s track record with Extended Stay Hotels.
Blackstone acquired Extended Stay for about $2 billion in 2004, sold it to Lightstone Group in 2007¬†for $8 billion and got sued by creditors in 2011, who alleged that the Blackstone sale of Extended Stay to Lightstone was overpriced and Extended Stay’s resulting high debt burden from the transaction forced it into bankruptcy.
And, after buying Extended Stay in 2004 and selling it in 2007, Blackstone turned around in 2010 and invested $100 million in a consortium that purchased Extended Stay and transitioned it out of bankruptcy, Ashworth says.
It’s a scenario where Extended Stay appears to have become a financial instrument instead of — or in addition to being — a hotel brand.
Travelport and Extended Stay aren’t the only travel industry companies impacted by private equity, of course.
Several airlines have been in play with private equity coming to the rescue, making investments and turning things around.
Texas Pacific Group and Silverlake Partners took Sabre private in 2007 for $5.4 billion and Sabre officials indicated in the past that the transaction enabled Sabre to benefit from new investment in its infrastructure.
It is difficult to gauge how Sabre is faring these days because only its bondholders are privy to its earnings.
Still, Travelocity, which is owned by Sabre, certainly has broken out of the pack in the last few years under private equity stewardship, and is almost a nonfactor as Priceline and Expedia expand their global hotel businesses.
Various companies in the travel industry undoubtedly have had different experiences with private equity owners.
So, what’s your take on private equity’s track record in travel? A plus, a minus or neutral?