Cendant buys Orbitz for $1.25B

NEW YORK -- Cendant agreed to acquire Orbitz for $1.25 billion in cash, an acquisition that alters the competitive landscape in travel distribution.

The deal, if approved, would allow Cendant to overtake Travelocity as the travel industrys second-leading Web player after IAC/InterActiveCorp, likely diminishing Worldspans role as an online booking engine in the process.

It could pave the way for an invigorated GDS offering from Cendant and further expand the Orbitz brand into corporate and intermediary markets.

The deal, in which Cendant agrees to buy Orbitzs Class A and Class B shares from the public and the Web sites airline founders, is expected to close in November and is subject to regulatory approvals.

Heres where some of the effect will be felt:

The Web

Cendant will transfer the operations of CheapTickets, Lodging.com and Neat Group to Chicago, where Orbitz and its more than 400 employees are headquartered, and the companies technology platforms will be integrated with Orbitz. A president of Americas Consumer Travel will oversee these businesses from Chicago, along with a satellite office in Denver.

As part of the agreement, Cendant pledged to continue providing its unbiased fare displays on Orbitz.com and to maintain Orbitzs charter associate agreements and Supplier Link contracts.

These direct-connects account for about 40% of Orbitzs air volume. Much of Orbitzs management, with the exception of the departing chairman, president and CEO, Jeffrey Katz, is expected to remain.

Cendants Sam Katz, chairman and CEO of TDS (no relation to Jeffrey Katz), told Travel Weekly that Cendant intends to maintain the Orbitz, CheapTickets and Lodging.com brands, noting that the demographics of their users are different.

Now, we have three nets to get them, Katz said, referring to consumers shopping on multiple sites.

Cendants Web businesses will edge out Travelocity in online market share, 22% to 20%, according to Legg Mason. IAC/InterActiveCorp commands a 49% online share with Expedia, Hotels.com and other sites. The combined Cendant Travel Distribution Services division and Orbitz accounted for $6.9 billion in gross travel bookings in 2003.

The GDS connection

Sam Katz said Worldspans Orbitz contract, which runs through 2011, stays in place.

But, with Cendant owning rival GDS Galileo, observers skeptical about Cendants commitment to Worldspan arent hard to find.

People are anticipating a rapid move away from Worldspan and there are technical, business model and contractual implications that have to be sorted out, said Chicke Fitzgerald, the CEO of the Solutionz Group.

Henry Harteveldt, Forrester Research vice president of travel research, noted that Cendants purchase of Orbitz makes Worldspan even more vulnerable. Worldspan already lost part of its Expedia business to Sabre.

Orbitz and six of its airline partners are already bypassing Worldspan with Orbitz Supplier Link, an offering that Harteveldt characterized as one of the brightest jewels in Orbitzs crown.

But when asked whether the acquisition will fuel the direct-connect/GDS-bypass trend, Sam Katz said, We already have direct-connect. Its called a GDS.

In that regard, in the deregulation environment, Orbitz was known to be working on a GDS/agent desktop offering. And that could only benefit Galileo, which is the only GDS without a viable, browser-based desktop.

From G2 SwitchWorks to ITA Software, no one has figured out how to go after agencies without incentives, Sam Katz said. This [acquisition] gives us the ability to go after a browser-based desktop for agents with a better offering, a stronger offering than anyone else.

Corporate travel

In business travel, Cendant said corporate customers will be able to choose between Cendants Travelport and the Orbitz for Business brands.

Travelport also will take up new residency in Chicago and will have a smaller facility in Seattle. Integration with Orbitz for Business will take in technology, merchandising, policy and reporting systems, customer service and GDS solutions under TDS Corporate Solutions, Cendant said.

The Travelport/Orbitz for Business pairing comes as megas and online travel-management companies have been flirting with relationships.

At the PhoCusWright show in London last week, it was widely rumored, for instance, that Expedia had talked with WorldTravel BTI about a venture (which Expedia denied).

On a much smaller scale, the Travelport/Orbitz for Business combination is such a coupling. Sam Katz noted that Cendant will talk with customers about how to segment the offerings.

The nice thing is that Cendant has some choices, said Harteveldt, noting that Travelport/Orbitz for Business strategies could target global vs. domestic products or large-bus- iness vs. small-business clients.

Harteveldt noted that IAC approached Orbitz about a deal last year. We have said that in order to survive, Orbitz would have to be acquired or find other companies to acquire.

Along those lines, when Orbitz executed its $300 million initial public offering in December, it took many hits on Wall Street for having an unappealing business model, with its over-reliance on air sales and dwindling booking-fee structure.

In 2003, Orbitz lost $16 million (including a one-time $26.5 million noncash charge related to stock options. For the first six months of 2004, net income was $12.2 million).

In 2005, Cendant expects the Orbitz purchase, if it closes next month, to increase earnings per share by about a penny.

To contact reporter Dennis Schaal, send e-mail to [email protected].