By Carla Costa and Camilla Cameroni
Founded in February 1999 by Javier Pérez-Tenessa de Block and James Hare, two young marketing professionals, the online travel agency eDreams took up rapidly. The idea was not original, but they were positioning their venture differently from the others, offering unusual, aspirational and hard-to-find holidays. In 2000 eDreams recorded €8 million worth of booking and by 2004 it was handling almost 10 times this amount (fig.1). With entrenched positions in Spain, Italy and Portugal, the fast-growing firm attracted the attention of PE companies given its cash generation, organic growth and sector consolidation potential. The OTA (Open Travel Agencies) space, indeed, was ripe for the kind of pan-European buy-and-build strategy that PE professionals are so keen on. The control quickly passed from the previous VC investors to the American growth investment firm TA Associates, which paid € 153 million. After few years of brilliant performance, Permira decided to enter the business and made its 75% buyout approach in 2010. The €300 million deal was partly funded by €117 million loans from UBS.
The following year, in 2011, Permira partnered with Axa Private Equity to acquire British rival Opodo too. The €450 million buyout grouped together eDreams, Opodo and GO Voyages (already owned by Axa PE). They created a new company, ODIGEO, which became the largest European OTA in the flight segment. The Opodo acquisition was financed borrowing €340 million via a newly created entity, called Geo Travel Finance.
Shadow of a crisis
However, the great success of online travel agencies was concerning some market participants. In August 2008, for instance, low-cost airline Ryanair launched legal action against eDreams, arguing that the online booking platform was illegally adding costs to consumers. Moreover, the decline in tourism created by the crisis had a strong impact on the group’s revenues, since 80% of the groups booking were from consumers, and in 2009 eDreams reported a meagre 7% growth in bookings. This result was also due to the intense competition that forces the company to drop its prices by 17%. In January 2013, in order to mitigate the impact of the crisis, ODIGEO issued a new €325 million 7.5% five-year bond through its subsidiary Geo Travel Finance. In October, the group acquired for €13.5 million the French travel search engine Liligo, the first acquisition after the three-way merger orchestrated in early 2011.
As international economies were recovering from the financial crisis, PE investors from both Permira and Axa PE decided it was time to head from the door. On 6 March, ODIGEO publicly confirmed plans for an IPO on the Spanish Bolsa. It was jointly coordinated by Deutsche Bank and JPMorgan, with the support of mid-market bank Jefferies. On 8 April, ODIGEO went public at €10.25 per share, determining the Spain’s biggest IPO in three years. The group gained a market capitalization of €1.075 billion. Including net debt of €442 million, the company was valued at €1.5 billion, the equivalent of 12.8 times EBITDA. Alongside with 32 million of shares sold by existing shareholders, the company issued new shares and used the €50 million proceeds to repay its 2009 note and converted €155 million of outstanding loans into equity.
A month later, ODIGEO eDreams’ management presented its latest figures to investment community. Either due to poor communication skills or because the market was looking for any indication of weakness in the growth story of the company; thus the only message that equity analysts seemed to hear during the presentation was that, during the last quarter of fiscal year (the three months ended in March 2014) the company had experienced a growth of only 4% on the same quarter of previous year. Market over reaction caused eDreams stock to snap to €5.75. EDreams issued an explicative statement, but as the company failed to bring calm, stock price reached €3.63 and market cap of the group was down to €380 million by 10 July (fig.2).
The poor post-IPO performance further dived share price down to €3.14. As a consequence of the stock collapse, leverage now stood at more than 50% of the capital structure. When in October 2014 Iberia and British Airways halted ticket sales on ODIGEO platforms, stock price went down to €1.02 and trading was suspended by the Spanish stock exchange regulators.
Due to the significant under perfomance against the budget, the group’s financial position was becoming an issue as the leverage ratio was creeping up as earnings wore away, but PE owners could not possibly sell their shares at the prevailing discounted price.
Full-year numbers for 2014 were disastrous: EBITDA margin had fallen to less than 21%, and revenue margin from its core “flight business” was flat on the previous year. This was the demonstration of what the markets already knew: the ODIGEO’s business wasn’t worth what they had been told. In fact, ODIGEO booked goodwill impairment totaling €149 million. The exceptional goodwill amortization had been recorded to acknowledge that the core markets (France, Italy, Germany, the Nordics and the UK) did not offer the growth forecasted. Share price was down at €2.75.
After announcing one set of weak results after another, the PE-controlled group had introduced some management changes in order to regain trust from the investors. But it was not easy: the markets, in fact, had read the script perfectly, punishing management via extreme share price volatility for having overpromised and under-delivered.
Great trips start with great prices
EDreams flamed out shortly after its IPO, but it shouldn’t have been a surprise for those who had done their due diligence. The company had built a reputation as a growth company, but several factors had hardly weakened the organic growth potential of the business:
- The dotcom era companions were formidable disrupters of the holiday reservation sector and quickly most of travel agencies opened their online channel. By 2012 more than 40% of gross bookings across Europe were made online, compared to only 15% in 2006: it was obvious that the future pace of revenues would have slowed down.
- Over time, airlines fought back, either through legal means like Ryanair, or by developing their own websites to encourage passengers to book directly with them (earn travel miles).
- A new type of competitor, “metasearch engines”(websites that give fare aggregation on a broader scale) was intensifying competition, putting pressure on growth and margins.
- Lastly, the geographic focus choice was unlucky, as the core economies representing 60% of ODIGEO’s revenue (France, Spain and Italy) had been severely hit by the financial crisis.
For all these reasons, a business that had grown at triple-digit rates during its early phase when backed by VC, and at a double-digit pace when owned by PE partners, was only growing at single-digit numbers after its merger with GO Voyages and Opodo. This is what the public was buying at the time of the IPO, even if was not priced like that: a slow growth business.
Editor: Stefan Larsen
Authors: Carla Costa, Camilla Cameroni
- Sebastien Canderle, The Debt Trap, How leverage impacts private-equity performance, Harriman House Limited, 2016