Corporate Travel Management Ltd (ASX: CTD) has revealed the acquisition of US business Travel & Transport.
Corporate Travel is a provider of cost effective business travel management for the corporate market.
What is the acquisition?
Corporate Travel is going to buy Travel & Transport for (a cash and debt free enterprise value of) US$200.4 million.
Travel & Transport was founded in 1946. It is described as a leading US travel management company headquartered in Omaha, Nebraska. Over 90% of the 2019 total transaction value (TTV) was generated by the US segment, with the rest being made by the European business.
In 2019 it generated TTV of US$2.8 billion and pro forma (calculated) EBITDA of US$29 million (click here to learn what EBITDA means). More than 60% of the 2019 TTV was made from corporate air travel and another 30% was from hotels.
Corporate Travel believes the customer mix is highly complementary for its existing business, with a focus on professional services and healthcare clients. It has low customer concentration, with the largest customer representing only 2.5% of 2019 air volumes and the top 50 customers being less than 45% of air volumes.
Travel & Transport also owns Radius Travel, which operates a large-scale hotel program with partnerships with hotel brands in 160 countries.
Acquisition details
The implied acquisition multiple is 7x the Enterprise value / CY19 pro forma EBITDA based on the audited CY19 financials, which was prior to COVID-19.
It’s expected this acquisition will add 10% to profit/earnings per share (EPS) on a pro forma 2019 basis excluding synergies, and add 30% including synergies. Corporate Travel estimated full run-rate synergies of US$18 million, which are expected to be delivered within 2 years.
Once combined, the Corporate Travel business will be one of the leading mid-market corporate travel managers in the world with around AU$10.8 billion TTV and North American TTV of US$3.6 billion, based on 2019 numbers.
Trading update
As part of the update, Corporate Travel said that it and Travel & Transport are currently operating at 25% and 13% of last year’s transaction volumes, respectively.
Over July and August 2020, the ‘combined’ group generated average revenue of AU$14 million each month and an average underlying EBITDA loss of AU$5.7 million. The average cash burn was AU$7.5 million per month.
After the capital raising, Corporate travel will have a net cash position of $126.8 million and £100 million from a committed undrawn finance facility.
Capital raising
It’s going to raise $375 million for acquisition costs, integration costs, provide additional liquidity to fund potential losses for a prolonged period, give balance sheet flexibility and provide capacity for other acquisitions.
The capital raising is a full underwritten accelerated non-renounceable entitlement offer where each shareholder can buy a share for every 4.03 Corporate Travel shares they currently own at a price of $13.85, which is a 14.3% discount to the last traded price of 25 September 2020 of $16.16.
All non-executive directors have indicated they will take part in the offer, though Corporate Travel’s founder and managing director – Jamie Pherous – has indicated he won’t participate.
Retail shareholders like you and I will be able to take part on 6 October 2020.
Summary
It’s a risk to buy a travel business during this period of disruption. But, it’s a calculated risk that could work out well if travel mostly returns to normal by 2022.
I’m not interested in buying travel shares right now – it’s hard to say when/if the travel market will return to normal. For that reason, I’d rather buy other ASX growth shares like Pushpay Holdings Ltd (ASX: PPH) or Bubs Australia Ltd (ASX: BUB) which have a clearer path to long term growth.
