Cendant deal should be hefty boost for Orbitz

By Kathy Bergen
Knight Ridder News Service

CHICAGO — The formal announcement yesterday that Cendant Corp., the world's largest hotel franchiser, will buy Chicago-based Orbitz Inc. for $1.25 billion should become a marketing shot in the arm for the nation's third-largest online travel agency and a welcome cash infusion for the five major airlines that founded the company.

"Cendant has a much larger balance sheet and a dramatically higher level of cash flow that it can invest in Orbitz, primarily through marketing," said Tim Fidler, director of research for Ariel Capital Management.

"Orbitz, as a standalone, is pretty much break-even," he said. "And that's a tenuous position to be in if you have to continue to spend aggressively to get more share in a growing market."

If the deal wins necessary regulatory approvals, the five airlines that founded Orbitz in February 2000 will see a hefty return on their initial investment of $214 million, said Jeffrey Katz, chairman, president and chief executive officer of Orbitz.

The five carriers — American, United, Delta, Northwest and Continental — stand to reap more than $700 million in this deal, and that's on top of $250 million from an initial public offering last December.

After the IPO, the airlines retained a 67.6 percent stake in the firm. American and United, the largest stakeholders with 16.7 percent each, stand to gain $184 million each.

Cendant, which franchises Days Inn and owns Avis Rent A Car System Inc., will pay $27.50 a share, a 32 percent premium over Orbitz's closing price of $20.77 on Tuesday. The premium is less for those who bought shares during the IPO, when they sold for $26.

Orbitz stock closed at $27.17 yesterday, gaining 30 percent. Cendant shares were down 9 cents, closing at $21.93.

Although the cash infusion to the airlines is small relative to the size of the airlines' economic woes, "every bit of cash in this environment helps airlines," said Ray Neidl, an airline/aerospace analyst for Calyon Securities.

The deal would help Cendant as well, filling a void in its complement of travel businesses.

"We had a strategic goal to be a leader in online travel for consumers and corporations, and we had our own smaller business, but this leapfrogs us into a leadership position in the industry," said Samuel L. Katz, chairman and chief executive officer.

Expedia, which is owned by Barry Diller's InterActive Corp., holds 39 percent of the market, while Travelocity, owned by Sabre Holdings Corp., holds second place, with 20 percent.

Cendant owns a smaller player, CheapTickets, and with the purchase of Orbitz, with its 18 percent share, Cendant would have a 22 percent share, overtaking Travelocity, analysts say. Cendant plans to continue to operate both sites.

"This would make Cendant a much more substantial player in the world of online travel," noted Jerome Galant, director of research for Huberman Financial.

Cendant is paying handsomely for the privilege, analysts say.

"On the surface, it seems expensive," said Fidler. "Anything in the $1 billion range pushes into a different league."

But if Cendant can hit the performance numbers it projected yesterday, the price will not have been out of line, he said.

"They are pretty good at integrating businesses and getting them to work the way they want them to," he said.

Cendant projects the acquisition would bring in additional free cash flow of $90 million next year, and $175 million to $225 million in 2006. And by 2006, the acquisition should boost earnings per share by 7 to 9 cents, the company projects.

The company hopes to cut costs and boost transactions across its travel businesses by shifting to one technological and one operational system in Chicago, said Samuel Katz, who is no relation to Orbitz's Jeffrey Katz.

The company will move its travel-distribution-services division to Chicago. The division employs 5,000 people around the world, but the company did not know yet how many of them would be moved to Chicago.

Orbitz employs 400 people, almost all in technology and marketing.

And Jeffrey Katz will exit Orbitz after a transition period, which is expected to be 60 to 90 days.

One challenge for Cendant will be how to differentiate Orbitz from its competitors, said George Novak, an industry analyst at Georgetown University's Aviation Institute.

"I think that's the potential down side. Was Orbitz the right one to go after?" he said.