Capital Structure of Orbitz

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  • U.S. Online Travel Industry Size ???Online travel is the largest eCommerce categoryIndustry moves with the economyEconomy is stabilizing but still uncertain around timing and sustainability of recoveryBusiness travel, a key indicator of the overall health of US economy, bouncing back due to higherthan anticipated GDP, more robust export and corporate profits in 2010US: most mature market (54% penetration rate) where growth of bookings has slowedEurope, Asia Pacific: high level of fragmentation, particularly in hotel industryContinue to benefit from increase in Internet usage and growing acceptance of online bookingSignificant growth opportunities in Asia Pacific where competition is not as entrenchedEurope (37% penetration rate); Asia Pacific (21%)
  • Online travel distribution industry consists largely of Expedia, Travelocity (owned by Sabre), Priceline and Orbitzand more focused players such as Allegiant and Ctrip.com.Sabre is also owned by a private equity group, Silver Lake Partner and The Texas Pacific Group. Its ratings rank equally to Orbitzeven though leverage is much higher. Having generated over $3 billion in revenues in 2006 (prior to going private) – affords Sabre operating room with respect to capital structure. Silver Lake and The Texas Pacific Group are also viewed somewhat more favorably than Blackstone, which has a history of very aggressive LBOs and special dividends.Allegiant is a leisure travel company that operates in the U.S. transporting travelers in small cities to cities like Las Vegas, Orlando, Phoenix, Tampa/St. Petersburg, Los Angeles, and Ft. Lauderdale. Operates its own regional aircrafts, and as such we would expect a much more conservative capital structure given high capital intensity and energy sensitivity of its business. Greater usage of off balance sheet financing in the leasing of aircraft.Ctrip.com is a China-based leisure travel services company that operates in Asia only. Capital structure is all equity, which is probably not the best use of financing – but likely driven by conservative financial policies of management, less developed debt capital markets, and lower appetite for debt generally in the Asian market.
  • The acceptable median for Orbitz might be closer to 5x debt/EBITDA.But, because its owners have sought to extract financial resources from Orbitz in the past (typical of private equity-owned firms), Ratings Agencies typically want up to a two-notch cushion in leverage.More recently, Orbitz also faces negative pressure from Travelport potentially going into financial distress. Travelport is the global distribution (GDS) provider for Orbitz and also issues letters of credit for Orbitz.So while Orbitz’s business profile is ‘fair’, performance and liquidity adequate, its relationship to Travelport constrains financing options.A company like Orbitz would be loathe to go beyond prescribed measures for fear of a downgrade – essentially closing its doors to external debt financing.
  • Seasonal cash flow pattern.Gross bookings are generally highest in the first half of the year as customers plan and purchase their spring and summer vacations. Net cash outflows during the second half of the year Working capital fluctuations addressed by drawdowns on revolver ($72.5 mil revolving credit facility, of which $60 mil still available)Financial covenants :minimum fixed-charge coverage ratio requirement of 1.0x and a maximum total leverage ratio of 3.0x
  • Company has no intention to pay dividends on their common stock for the forseeable future, but they will likely pay another special dividend at some point to Travelport/The Blackstone GroupCompany paid $109M special dividend at time of IPO and term loan facility in 2007
  • Capital Structure of Orbitz

    1. 1. Agenda• Orbitz and the Travel Services Industry• Firm Operating Strategy• Business/Operating Risks• Financial Structure• Competing Firms• Optimizing Capital Structure• Recommendation page 1
    2. 2. About the Travel Services IndustryThis industry comprises businesses primarily engaged in selling,booking and arranging travel, tour and accommodation servicesto the general public and commercial clients.Key US Indicators:Revenue Annual Growth (‘11-’16)$21.6bn 1.7%Profit Wages$992.4m $5.0bn page 2
    3. 3. Industry Tied to Economic RecoveryOnline Travel Industry • Worldwide travel industry large and dynamic with rapid and significant Penetration Rate change • Significantly impacted by prolonged recession 2008-2009 and tight credit markets • Business travel bouncing back due to higher than anticipated GDP, 54% more robust export and corporate profits in 2010 37% • US most mature market where 21% bookings have slowed • Europe, Asia Pacific highlyUnited Europe Asia Pacific fragmented but growingStates and ROW
    4. 4. 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
    5. 5. Key Business Activities of the Firm page 5
    6. 6. Orbitz: Firm Operating Strategy • Strong portfolio of global brands • One of the most recognized in the US Powerful Brands • Difficult for new competitors to create strong online travel brands given existing marketplace • US brands alone attract 48 million registered users andLarge and Loyal Customer more than 25 million unique visitors Base • Loyal base of repeat customers • Most comprehensive set of supplier relationships across Broad and Diverse all travel categories Supplier Relationship • Long-term agreements with suppliers • Track record of pioneering travel technologies that deliver superior user experience and repeat sales Technology Leadership • Moderately heavy investment spending on technology and fulfillment will remain limiting factors to earnings growth • Economies of scale as technology and marketing expenses can be leveraged across brands and Economies of Scale geographies • Structural advantage against new competitors
    7. 7. Online Segmentation Orbitz operates a number of sites targeting specific market segments: ORBITZ CHEAPTICKETS HOTELCLUB EBOOKERS CHEAPTICKETSU.S. full service U.S. full service International European full U.S. full service online travel online travel hotel-focused service online online travelagency targeting agency targeting online travel and offline travel agency targeting experience- price-sensitive agency agency, targeting price-sensitive driven travelers travelers Access to experience- travelers extensive driven travelers proprietary global Presence in 13 hotel inventory in European over 120 countries countries with high margins through affiliation with GTA page 7
    8. 8. Orbitz Business Overview Total 2010 Revenue by Category Advertising Other 2010 2009 2008 & Media 15% Air 7% 36%Revenue ($Mil.) 757 738 870 Vacation Packages 15%% growth 3% -15% 1% Hotel 27%EBITDA ($Mil.) 142 128 125% margin 19% 17% 14% Consolidated Gross Total 2010 Revenue by Geography Bookings Gross Bookings % growth ROW 24% 11,370 10,615 Domestic 9,942 76% 2010 2009 2008
    9. 9. Direct CompetitorsThe online travel distribution industry consists of few large global playersand many smaller regional firms Gross Bookings Expedia, 25,962 Sabre Priceline.com, 13, 646 Orbitz, 11,3700 0.5 1 1.5 2 2.5 3 3.5 page 9
    10. 10. Direct Competitor Comparison 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 CTrip.co Travel mCorporate 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 4,470.0Revenue 757.5 NA 3,348.1 3,084.9 663.6 499.32EBITDA 157.6 NA 964.8 909.9 139.6 189.2EBITDA 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 0.0xDebt to Capitalization 73% NA 40% 22% 9% 0%FFO to Debt 23.7% NA 41.1% 152.5% 377% NA • 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 10
    11. 11. S&P Key Industrial Medians to Rating 80.0% 7 70.0% 6 60.0% 5 50.0% 4 40.0% 3 30.0% 2 20.0% 1 10.0% 0 0.0% BB BBB B BB BBB B Average Average Average Average Average AverageEBITDA Interest Debt to 1.9 3.9 6.5 75.9% 53.7% 42.5% Coverage (x) CapitalizationDebt to EBITDA (x) 5.3 3.5 2.2 FFO to Debt 11.5% 22.4% 35.9% • 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. page 11
    12. 12. Strengths Key Credit Highlights • Strong global brands with • High leverage compared to leading industry positions industry peers • Technology leadership • Aggressive financial policies • Breadth and diversity of • Corporate carve- products and suppliers out/separation risk with • Growth potential of hotel and Travelport dynamic package bookings and • Dependence on highly internationally competitive and seasonal • Significant marketing and travel industry eCommerce expertise • Moderate barriers to entry given importance of technology, brand awareness, supplier relationships • Positive free cash flow Risks
    13. 13. Current Capital Structure • 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%
    14. 14. Key Debt Metrics EBITDA/Interest (x) Debt/EBITDA (x) 3.4 5.9 2.5 4.5 4.3 2.1 3.3 1.32007 (B/Stable) 2008 (B/Neg) 2009 (B/Neg) 2010 (B/Stable) 2007 (B/Stable) 2008 (B/Neg) 2009 (B/Neg) 2010 (B/Stable) FFO/debt (%) • Leverage is high but commensurate with credit profile • Notable improvement in key 23.7% metrics 14.7% 15.5% • Demonstrated commitment to 3.7% debt repayment and improved2007 (B/Stable) 2008 (B/Neg) 2009 (B/Neg) 2010 (B/Stable) free cash flow generation
    15. 15. Capacity to Absorb Low-Probability Adversity 2010A 2011E 2011E 2011E • Sources of cash positive (-20%) (+10%) (+20%) even in event of 20%EBITDA 142 114 157 171 EBITDA declineFunds from • Good banking relationshipsoperations 116 93 128 140 and access to capitalChanges inworking capital (18) (18) (18) (18) marketsMaintenance • Capital expenditures largestlevel capex (40) (40) (40) (40) cash useDiscretionarycash flow 59 35 70 82 • Plus annual prepayment onRevolver the Term Loan (50% excessavailability 60 60 60 60 cash flow)Maintenance • Minimal maturities overcash 97 80 80 80 next three yearsLiquidity 216 175 210 222 • Healthy cushion to financial covenants
    16. 16. 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
    17. 17. 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
    18. 18. 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 page 18
    19. 19. Appendix
    20. 20. Why Optimal Capital Structure is Constrained‘B-/B3’ Corporate Credit ‘B/B2’ Corporate Credit ‘B+/B1’ Corporate CreditRating Rating Rating- 4.5x to 6.75x - 4.0x-4.5x debt/EBITDA - 3.5x debt/EBITDAdebt/EBITDA - Debt structure entirely - Would enable Company- Debt structure entirely bank debt (term loan plus to access public bondbank debt (term loan plus revolving credit facility) at markets with seniorrevolving credit facility) LIBOR + 300 bps unsecured debt rating of- Significant reliance on - Limited access to public ‘B-/B3’free cash flow generation bond market in current - Capital markets closed toto repay obligations capital market environment Unsecured Bonds rated - Leverage is below below ‘B-/B3’ average but constrained by - Debt structure could ownership structure consist of senior secured - Some financial flexibility bank debt and unsecured for additional financing: bonds acquisition related debt - Lowers cost of capital capacity of $200 to $250 - Enhanced financial mil flexibility and ability to respond to opportunities 20page
    21. 21. Assessing Orbitz for Capital Structure Business Risk Profile Financial Risk Profile (MODERATE) (AGGRESSIVE)

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