Fast exit in the works? Travelport's owners mulling options

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Travelport Ltd., the travel services conglomerate that was acquired seven months ago by private equity firm Blackstone Group and other investors, is almost certain to be in play again soon, sources close to the company's management said last week.

The sources, who asked not to be identified, said Travelport's announcement last week of a $1.1 billion loan, to be used to pay a dividend to new owners Blackstone, Technology Crossing Ventures and One Equity Partners, is evidence of a pending transaction.

Among the new owners' options are taking the company public, selling it outright or spinning off parts of its business.

The loan, known as a payment-in-kind or PIK loan, was orchestrated by Blackstone through a number of banks, including Credit Suisse and UBS.

The loan is being financed through subscriptions by a host of institutional investors, commercial banks, hedge funds and other investors, said Raffaele Sadun, Travelport's senior vice president of enterprise planning and corporate development.

Proceeds will go directly to the new investors, who bought Travelport from Cendant Corp. in August for $4.3 billion. The loan enables the investors to recover a quarter of what they spent in the acquisition.

"It is an advance on an exit proceeding that Blackstone would expect in the next 12 to 18 months," Sadun said.

He said Blackstone and other stockholders were scheduled to receive the $1.1 billion in proceeds from the loan this week.

Whether the exit strategy will be to take Travelport public, sell it or spin off parts has not yet been decided, according to insider sources, who said a resolution was expected within 18 months.

Among the 20 global brands that Travelport owns are Orbitz, CheapTickets, Gullivers Travel Associates and Galileo. It expects to acquire Worldspan later this year.

Travelport executives late last week declined to elaborate on what strategic options were being considered.

Earlier this month, Travelport said it was planning an initial public offering for all or part of Orbitz Worldwide.

PIK loans were once relatively rare debt instruments, sometimes controversial and often seen as a stop-gap measure for companies that needed to raise capital for a short-term need without an outlay of cash for interest payments.

But according to corporate finance experts, the loans have become popular in the currently red-hot private equity market as a leveraged buyout tool.

The loans can be risky for investors as well as for borrowers, said a debt and equity specialist with a London-based merger and acquisition tracking company, who asked not to be named. While loan holders receive high interest rates, the loans historically carry a significant risk of default.

"Those who invest in those types of loans have an incentive to get high interest rates, but the trick is getting out at the right time," the source said. "It's kind of like trying to catch a falling knife."

Sadun said the risk lays with investors rather than borrowers. But borrowers also take a risk, analysts said, because accruing interest can create a huge payment at the time the loan comes to maturity.

PIK loans are made with no expectation that interest payments will be made until the loan comes to maturity. Travelport's PIK loan matures in five years.

Sadun said the loan was defendable "because Travelport is doing so well financially."

Paying off the loan and its accrued interest will clearly require Travelport to raise a large amount of cash or sell itself, either in the public market or to another acquirer, the sources said.

Blackstone could not be reached for comment.

"In most circumstances, PIK loans are used to raise capital quickly without encumbering other cash," the debt and equity analyst said. "But in this case, where proceeds are being used to pay a dividend to the new investors, it is definitely more unusual."

Sadun and Kevin Monaco, Travelport's treasurer, acknowledged that the PIK loan transaction was unusual, but only from the standpoint that Blackstone and other investors were launching their exit strategy so soon after the acquisition.

Travelport, though privately owned, has publicly disclosed results of its business operations since it was sold by Cendant. It reported $2.6 billion in revenue for 2006.

Travelport declined to say whether stockholders other than the three private equity firms that acquired the company would receive part of the $1.1 billion loan proceeds.

To contact reporter Dan Luzadder, send e-mail to [email protected].

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