AUSTIN--(BUSINESS WIRE)--Expedia, Inc.'s (Expedia, rated 'BBB-') announcement of a definite agreement to acquire Orbitz Worldwide, Inc. (Orbitz) will not affect the company's rating, according to Fitch Ratings. The acquisition is consistent with Expedia's past history and the company has sufficient financial flexibility to complete the deal and remain within the context of the current rating. A full list of ratings follows below.
Expedia agreed to acquire Orbitz for $12 per share in cash, representing an approximate $1.6 billion enterprise value and reflects a 10.25x EV/EBITDA multiple. Approvals have been received from both companies' board of directors, but approval by Orbitz' shareholders and by regulators remain outstanding. The deal follows on the heels of Expedia's recent $280 million acquisition Travelocity and its November 2014 $612 million acquisition of Wotif Holdings Ltd. Given management's commentary on the Feb. 12 call that they are comfortable with leverage temporarily increasing above 2x due to an acquisition, along with management's historical actions (most recently, Wotif was largely debt-funded), Fitch expects Expedia to utilize debt to fund a portion of the acquisition.
Fitch calculates unadjusted leverage of 1.7x at Fiscal Year End (FYE) 2014, providing some flexibility for a debt-funded acquisition at the current rating. There is room for leverage to spike above 2.0x due to strategic acquisitions, so long as Fitch views the transaction as favorable and is comfortable that leverage will be reduced within a 12-18 month period. If this deal is partially debt funded and causes leverage to rise above 2.0x, there will be limited-to-no headroom within the rating for any additional material debt funded acquisition or capital return until leverage has returned sustainably below 2.0x.
Fitch's base case models Expedia funding approximately $750 million - $1 billion of the purchase price with debt, which increases pro forma leverage into the low-to-mid 2x range. Ratings will be negatively pressured if Expedia materially funds the transaction with debt in the $1.4 billion - $1.6 billion range. However, even in this case, Fitch believes Expedia has the sufficient liquidity and financial flexibility (particularly a potential reduction in share repurchases) to remain at the current rating.
At Dec. 31, 2014, Expedia had $1.4 billion in cash ($1.1 billion pro forma for the $280 million Travelocity deal) and generated $953.9 million in free cash flow (FCF) during the year. With FCF expected to be in the $800 million - $1 billion range, and an expected increase in debt of $750 million - $1 billion, Fitch believes Expedia will be able to sustainably continue capital returns at a pace similar to 2014 while delevering to below 2.0x within 18 months on EBITDA growth (Expedia paid $85 million in dividends and repurchased $538 million of shares on a gross basis during the year). If operating performance is weaker than expected, Fitch expects Expedia would consider reallocating capital from share repurchases to debt reduction in an effort to remain within the current rating.
Fitch views the transaction as strategically sound, as larger competitors within the industry benefit from economies of scale and smaller players are increasingly unable to compete as effectively on items such as marketing and technology spend. Management expects an annual run-rate of $75 million in cost savings, which Fitch anticipates will be achievable (duplicative functions). The integration of Orbitz is a larger endeavor than its recent acquisitions; Orbitz's 2014 gross bookings were $12.5 billion while Expedia's 2014 gross bookings totaled $50.4 billion. However, mis-execution concerns are offset by Expedia's historic track record of successful integration. Further, Expedia should be close to completing the Wotif integration by transaction close of Orbitz, alleviating concerns of missteps resulting from overextending in an attempt to integrate too many brands into its platform in too short a period of time.
The deal will give Expedia access to Orbitz's base of air travel customers, significantly increasing the size of the segment. In 2014, Orbitz derived 28% of revenues from airline tickets sales while Expedia only generates 8% of revenue from airline ticket sales. The addition of Orbitz will increase Expedia's airline ticket sales revenue by 56% to over $700 million, assuming no deterioration of the customer base post-transaction. While the unit economics on air ticket sales is not as favorable as hotel sales, Fitch believes that capturing a larger airline customer base is prudent over the longer term as it adds to the comprehensiveness of Expedia's broad offerings while providing opportunities to cross-sell other products or bundles to generate revenue synergies.
As the competitive and technological landscape continues to change, traditional OTAs will vie to increase their global share and maintain their relevance in the face of other travel providers moving down the purchase funnel (i.e. TripAdvisor's instant book). Fitch expects Expedia to continue growing organically and by acquisition, possibly operating closer to the 2.0x leverage range than it has in the last few years.
Fitch currently rates Expedia as follows:
--IDR at 'BBB-';
--Senior unsecured bank credit facility at 'BBB-';
--$500 million in 7.456% senior unsecured notes due 2018 at 'BBB-';
--$750 million in 5.95% senior unsecured notes due 2020 at 'BBB-';
--$500 million in 4.5% senior unsecured notes due 2024 at 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);
--'Expedia, Inc.' (Aug. 13, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Expedia, Inc.
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=759168
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