Travel mates stick together

It has been a tough few years for shareholders of travel agency Jetset Travelworld. The owner of the Jetset and Travelworld retail outlet brands has mostly been unloved by the market, while the big player in the sector, Flight Centre, has surged in value.

And only a little more than two years after Jetset merged with Qantas Holidays, the company is set to merge with yet another private player, Stella Travel Services Holdings.

The deal will probably go through – given that Qantas holds about 58 per cent of Jetset stock and Melbourne travel industry identity Spiros Alysandratos another 25 per cent, and both parties have given their tentative approval to it.

Yet so far, Jetset shareholders have received scant information about the deal. An explanatory memorandum has been delayed and is now set for release in the last week of July, according to Jetset management. A shareholder meeting to vote on the deal is planned for late August.

Without this information, it is hard for investors to judge whether it’s a good deal. At face value, combining Jetset’s retail outlets with those owned by Stella, including Harvey World Travel, would make sense.

The combined chains would be the biggest travel retail outlets in Australia and would have a strong corporate travel presence through brands such as Travelscene and American Express.

Sources familiar with both companies and the contents of the explanatory memorandum say the combination of Jetset’s strong wholesale businesses and Stella’s retail outlets (in particular, Harvey World Travel) make the merger a good fit, and the arrangement would enable important synergies.

The timing of the deal could be good as well. Alysandratos, who owns private travel wholesaler and distributor Consolidated Travel Group, says conditions in the travel sector are improving. “Outbound travel is going well and any time the Australian dollar is above 80¢ [US] outbound travel does well. And corporate travel is starting to come back slowly as well.”

Like other Jetset shareholders, Alysandratos is waiting on more information about the deal but he is generally positive about it, saying: “Any business is about people, and if they have the right people there, and I think they do, it should be all right.”

Alysandratos has been a large shareholder in Jetset for more than six years and says he is committed to keeping his stock in the company, though it will be diluted in the deal (his stake was also diluted after the merger with Qantas Holidays in 2008). He does concede the stock has not performed well of late or in recent years.

Since the Stella deal was announced in May, Jetset shares have fallen by about 20 per cent to trade at about 84¢. Ironically, the fall in share price could make Stella good value. Under the terms of the deal, Stella shareholders will be issued with about 219.5 million Jetset shares (doubling the amount of shares on issue), which would value Stella at about $185 million. Prior to the deal announcement in May, Jetset shares had been rallying somewhat from a 12-month low of about 71¢ last July, reaching as high as $1.62 in late January – though they are still trading at well below the $3.54 price reached in December 2007, before the merger with Qantas Holidays.

The only information that Stella management has released before BRW went to press is that its business recorded earnings before interest, tax, depreciation and amortisation (EBITDA) of $30.9 million for 2008-09, and had net debt of $29.3 million as at April 30.

Jetset, on the other hand, is debt free. Its latest half-year profit result, for the six months to December 31, was a profit before tax of $7.3 million. When this was announced in February, Jetset management expected the second half of the financial year to be at least as strong as the first.

If they approve the deal, Jetset’s shareholders will be gaining a business that has had quite a roller-coaster ride in the past five years – one that now sees it worth about $2 billion less than its first owners, failed Queensland investment bank MFS, put on the business back in early 2007.

MFS, headed by former BRW Rich 200 list members Michael King and Phil Adams, was once a fast-growing outfit that styled itself as a “mini Macquarie Bank”. Stella was the jewel in its crown.

King and Adams spent more than $2 billion assembling the various businesses held under the Stella banner, including Harvey World Travel. It was acquired as part of the $700 million takeover MFS made of travel group S8 in December 2006 (S8 also owned Transonic Travel and Travelscene, among other brands).

Other businesses MFS bought include Tony Smith’s apartment letting company BreakFree, acquired in a $230 million deal in 2006.

King’s plan was to vertically integrate all the businesses, he says. “It was meant to be an integrated company where the travel agencies supported the accommodation product. I think it was a first for the times. I don’t accept the proposition it went wrong. It looked like a pretty successful business to me.’’

But Stella was later to labour under its large debt (which left investment bank UBS heavily exposed), as the global financial crisis hit and highly leveraged companies suffered.

By early 2007, MFS was looking for more cash and to take half of Stella off its balance sheet while maintaining the lucrative rights to manage the company. MFS sought about $1.2 billion to $1.3 billion, saying Stella was earning as much as $220 million EBITDA annually.

A deal with private equity outfit CVC Asia Pacific looked close, but CVC refused to pay the asking price. By early 2008, MFS was in trouble, and as its share price plunged and its need for immediate cash became apparent, it sold 65 per cent of Stella to CVC and UBS for $409 million cash and $906 million assumed debt respectively. Further write-downs and heavy losses followed (see timeline, opposite page) and MFS – which changed its named to Octaviar – collapsed after CVC and UBS became owners of Stella, along with some of its management. Stella has also sold off some of its brands.

Now an exit for both CVC and UBS is near. For them, the deal is doubtless the end of a long and costly journey (although CVC and UBS will have their shares held in escrow for about 15 months after the merger takes place).

Jetset shareholders will be hoping there are no more surprises to come and that the company settles down after two big mergers in only about two years.

Timeline of Stellar Resorts Group

October 2005: Gold Coast financial services firm MFS launches Stella Resorts Group.

February 2006: Holiday business Breakfree merges with MFS in a $230 million cash and shares deal.

March 2006: MFS considers selling Stella Resorts for up to $300 million, including debt.

November 2006: MFS merges with apartment-letting group S8, later combined with Stella.

February 2007: MFS begins search for private equity partner for Stella, wanting $1.2 billion for a 50 per cent stake and to maintain management rights.

November 2007: MFS forecasts EBITDA of $280 million for Stella but fails to sell 50 per cent of Stella to private equity outfit CVC Asia Pacific.

January 2008: MFS shares plunge after it reveals it needs to raise $550 million.

February 2008: MFS sells 65 per cent of Stella to CVC and UBS for $409 million cash and $906 million assumed debt.

March 2008: MFS changes its name to Octaviar.

April 2008: Octaviar writes off more than $590 million in losses incurred by Stella.

July 2009: CVC buys further 35 per cent Stella stake for $3.2 million and the conversion of a $364 million loan into shares from Octaviar. It also injects another $47.5 million into Stella.

August 2009: Stella’s travel business de-merged from its hospitality and some of its overseas divisions.

July 2009: UBS writes off about $575 million in debt in exchange for 40 per cent stake in Stella.

February 2010: Financial accounts reveal $667.1 million loss in 2008-09 for Stella, including write-offs and restructuring costs. Yet EBITDA reaches $54.6 million.

May 2010: Jetset Travelworld announces intention to merge with Stella, expected to be completed by August.

July 2010: At current Jetset share price, Stella is valued at about $185 million if the merger is completed.

BRW

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