Cendant to buy No. 3 Web travel firm

Purchase of Orbitz expected to give largest hotel franchiser a boost

$1.25 billion price called `expensive'

September 30, 2004|By Kathy Bergen | Kathy Bergen,CHICAGO TRIBUNE

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

"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, Cendant's chairman and chief executive officer.

If the deal wins regulatory approvals, the five airlines that founded Orbitz in February 2000 will get a hefty return on their initial investment of $214 million, said Jeffrey Katz, chairman, president and chief executive officer of Orbitz, who is no relation to Samuel Katz.

The airlines - American, United, Delta, Northwest and Continental - stand to reap more than $700 million from the deal, on top of $250 million from an initial public offering in December. After the IPO, the airlines retained a 67.6 percent stake in the company. American and United, the largest stakeholders with 16.7 percent each, stand to gain $184 million each.

"This represents a substantial premium to the marketplace, and it's an attractive offer for all our shareholders," Jeffrey Katz said yesterday.

"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 at 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."

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 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's shares slipped 9 cents to $21.93.

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

The deal would help Cendant fill a void in its complement of travel businesses.

Expedia, owned by Barry Diller's InterActive Corp., holds 39 percent of the market. Travelocity, owned by Sabre Holdings Corp., is No. 2 with 20 percent.

Cendant owns a smaller company, CheapTickets. Buying Orbitz and its 18 percent share would give Cendant a 22 percent share and allow it to overtake 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," said Jerome Galant, director of research for Huberman Financial.

Cendant is paying handsomely for the privilege, analysts say.

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

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

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.

Jeffrey Katz will leave Orbitz after a transition that is expected to last 60 to 90 days.

Being purchased by a deep-pocketed owner should help, said Sanjay Ayer, stock analyst with Morningstar Inc.

"As an independent company, Orbitz has not had the ammunition that it will have now, the financial resources to spend on advertising," he said. "Cendant should be able to put all of its hotel and car rental on the Orbitz platform."

Orbitz has trailed Expedia and Travelocity in building hotels, the key to profitability in the business.

The acquisition would allow Cendant to pair Orbitz with its travel service division's CheapTickets.com, Lodging.com, HotelClub.com and Travel2/Travel4, a consolidator of international air travel. Cendant also owns Galileo, an airline and hotel reservation service used by travel agents.

The Chicago Tribune is a Tribune Publishing newspaper.

Other Cendant assets

Among other businesses owned by Cendant are Century 21, Coldwell Banker, ERA and Sotheby's International; Cendant Mortgage; Cendant Settlement Services Group; PHH Arval fleet management, and Fairfield Resorts timeshares.

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