Wall Street analysts said last week that Elliott Associates' investment in Travelport -- a nearly 12% stake, making it the second-largest shareholder -- stemmed from a view that the company is undervalued.

Travel industry analysts said the company has languished because, unlike its competitors, it has failed to invest in travel information technology.

Last week, the hedge fund disclosed its stake in Travelport via a filing with the Securities and Exchange Commission (SEC). Elliott Associates is managed by activist investor Paul Singer, who is known for shaking up companies.

In the SEC filing, Elliott indicated it will push for major changes at Travelport, including a potential sale of the whole company, its businesses or assets. Shareholders who hold 5% or more of a company are required to file a report with the SEC. Elliott's stake in Travelport is approximately 11.8%.

According to Travelport, its largest shareholder is investment firm BlackRock with a 12.7% stake. Elliott was listed as the third-largest stockholder, with 5.4%. But, according to Travelport, Elliott holds the remainder of its stock through other parties. Elliott is followed by investment manager Principal Global Investors, which holds 6.6% of Travelport's stock.

The company's shares soared 17% last Monday after Elliott's SEC filing. By Tuesday, shares were selling at $17. Wall Street analysts said the stock had been undervalued compared with the shares of its peers and competitors Sabre and Amadeus. Morningstar reported that combined, the three control 98% of the GDS market.

"The Elliot investment might have been made for some activism," said Dan Wasiolek, Morningstar senior equity analyst. "But based on language I have read, it appears it was made based on the investment manager's view that Travelport was undervalued, at least to some degree, which we agree with. Travelport's fundamentals are unchanged, but the market now is awarding Travelport a valuation in line with our unchanged fair value estimate of $17."

Mark Moerdler, managing director, senior vice president and research analyst at Bernstein, agreed that Travelport's stock was undervalued.

"Many believe that Travelport is trading at a discount to its peers ... in part because they have more debt, and in part because they don't have a software/SaaS [software as a service] business," he wrote in a note to clients.

Industry analyst Henry Harteveldt, founder of Atmosphere Research Group, said the company's "almost complete absence in travel IT services" has hurt its profitability and growth.

"Travelport is much more reliant on distribution than either Amadeus or Sabre," he said. "That concerns me, given how suppliers want to boost their direct distribution and reduce their third-party distribution costs, and concurrently agencies want GDSs to pay them ever-higher incentive fees."

Travelport's Travel Commerce Platform consists of two parts: Air and Beyond Air. The latter includes hospitality, payment solutions, digital services and advertising.

In its 2017 annual filing with the SEC, Travelport said it classifies revenue according to source, as either Travel Commerce Platform revenue or Technology Services revenue. In 2017, 96% of the company's net revenue came from the Travel Commerce Platform (Air accounted for 70% and Beyond Air for 26%); 4% of net revenue came from Technology Services.

Travelport said Technology Services encompasses hosting services to airlines as well as hosting reservations, inventory management and other systems for Delta.

"Travelport has been anemic for awhile," said Bob Offutt, senior technology analyst at Phocuswright.

Offutt said he believes that is partly because of the company's 2008 acquisition of assets from G2 SwitchWorks, aimed at developing a new desktop solution for agents. He said Travelport let G2 try to drive its future.

In addition, he said, "They failed to make good technology investments that would sustain them going into the future."

Travelport's mobile division and its eNett payment solution are both "bright spots for the company," according to Harteveldt, as is its full-on embrace of IATA's New Distribution Capability (NDC).

Travelport is the most highly NDC-certified GDS, with Level 3 certification as an aggregator and Level 2 certification as an IT provider (Sabre and Amadeus are both Level 3 certified as IT providers and Level 1 certified as aggregators).

Harteveldt voiced skepticism about maintaining Travelport as a stand-alone GDS.

"The question I have is this: Is Travelport really worth investing in?" he said. "Is yet another turnaround the solution to its problems, especially since some of the new products that Travelport needs ... may take several years to develop and then a few more years to ink some customer sales? Or should Travelport's assets be sold off to one or more other firms?"

Analysts believe a sale is possible. In a note to clients, the financial services firm Cowen said Travelport's debt is becoming more manageable, which could make it attractive to private equity. That could also enable the company to refocus on demands from OTA customers, grow its Beyond Air business, adapt to NDC and look to new opportunities like artificial intelligence.

Offutt said that even if Sabre or Amadeus were interested in buying Travelport, there would likely be antitrust issues. On the other hand, he said, one of the larger travel management companies might be interested in purchasing Travelport.

Elliott has already indicated via its SEC filing that it is a potential buyer.

"What does Elliott Associates believe it can accomplish that Travelport on its own has not?" Harteveldt asked.

If Elliott did acquire Travelport, Harteveldt said it would raise questions about whether the GDS would keep existing leadership. If not, finding qualified leaders would take time, he said, "which will further stretch out the time line to accomplish any desired changes."

JDS Travel News JDS Viewpoints JDS Africa/MI