Why we think Corporate Travel Management’s recent acquisition is a game changer

Corporate Travel Management (ASX:CTD) announced last week the US$200 million acquisition of US-based Travel & Transport (T&T) which transforms the company’s North American business and positions the company as the global leader in mid-market corporate travel services.

COVID-19 continues to adversely impact the sector and this highly strategic deal reinforces our view that CTD remains best placed to leverage its technology advantaged business model, taking share and consolidating the large and fragmented global corporate travel market. We also see a potential vaccine as a major catalyst for a sector recovery and like the balance sheet optionality with CTD having raised excess capital should further value accretive opportunities arise.

Key transaction details are as follows:

• CTD has agreed to acquire US-based Travel & Transport (T&T) for US$200 million (A$275 million) with deal completion anticipated in late October 2020.
• The transaction price implies 7.0x pre-COVID EBITDA (CY19 pro-forma) before accounting for synergies and 4.3x after US$18 million (A$25 million) of targeted synergies. This compares to CTD’s pre-deal trading multiple of approximately 11x EV/EBITDA.
• The deal has been funded by a A$375 million entitlement offer (1 for 4.03) priced at $13.85 per share and includes A$4.5 million of CTD equity to be issued to T&T staff.
• Management expect the deal to be c.10 per cent EPS accretive pre-synergies and c.30 per cent post-synergies (CY19 pro-forma basis).
• Following the equity raising, the balance sheet remains in a strong position with A$127 million cash and zero drawn debt. After funding the transaction and integration plan, CTD will retain around $73 million in excess cash for further acquisitions. CTD also has a £100 million (A$182 million) undrawn committed debt facility on hand.
• Founded in 1946 and headquartered in Omaha, Nebraska, T&T is the largest US mid-market corporate travel management operator generating US$2.8 billion in Total Transaction Value (TTV), US$207 million revenue and US$29 million EBITDA for the year ended 31 December 2019.
• The full run-rate of synergies is estimated to be around US$18 million (A$25 million), expected to be delivered over a 2-year integration period. CTD highlighted that much of the planning work has already been done with a good line of sight on the main areas of cost duplication, such as rent and central overheads.
• Integration costs will be approximately US$10 million (A$13.7 million) primarily incurred in the first 6 months post completion.
• Technology optimisation represents a key area of further upside to the stated synergy target. Roughly 40 per cent of T&T’s transactions are online using third party booking tools. CTD expects to transition (and grow) these volumes across to its proprietary booking tool (‘Lightning’), materially reducing costs and expanding operating margins.
• T&T’s EBITDA margin of 14 per cent is around half that of CTD’s North American business at 29 per cent (CY19 pro-forma) and CTD sees no major structural barriers to lifting this margin towards its own. The key difference is CTD has its own technology tools and therefore higher automation, T&T has to pay for third party tools and needs many more people to operate.
• Combined business average cash burn around A$7.5 million per month over July and August which are historically the seasonal low point in corporate travel activity in the northern hemisphere (summer holiday period).
• Management noted it has seen some recovery over the past few weeks which is encouraging.

The deal rationale appears strategically sound to us; the acquisition adds material scale, is highly complementary to CTD’s existing North American business, brings a substantial synergy pack with upside from technology consolidation, and includes a leading corporate hotel program (Radius) which CTD can offer across its client base, further enhancing the value proposition.

The acquisition positions CTD as the global leader in the mid-market segment and the 5^th largest corporate travel service provider worldwide with a combined TTV of around A$10.8 billion based on pro-forma CY19 data, an increase of approximately 60 per cent. CTD was previously number seven with T&T number nine.

T&T adds strength to the management team with its senior executives staying on to lead the combined North American business (key management will participate in CTD’s long term incentive plan). This highlights CTD’s high regard for the business and its leadership.

The customer mix is highly complementary with T&T focused on professional services and healthcare clients (60 per cent), sectors CTD was underweight. Geographic exposure is broadened, adding T&T’s big base of clients based in New York and throughout the East Coast to CTD’s mainly West Coast presence.

Despite the strong rally in the share price, we think valuation remains attractive with the stock trading on sub 10x pre-COVID EBITDA ($240 million CY19 pro-forma basis incorporating T&T and synergies). Considering CTD historically traded on 15-20x EBITDA, the market appears to be discounting a significant and enduring impairment to the business’ earnings capacity (33-50 per cent). Although we acknowledge uncertainty around the pace of a potential recovery, pent-up demand is strong which suggests upside surprise potential when barriers are eventually removed. Furthermore, CTD is poised to gain meaningful market share from weakened competitors while the reset cost base also means less revenues are required to generate equivalent earnings.