Flight Centre’s Latest Deal Crashes

By Glenn Dyer | More Articles by Glenn Dyer

Shareholders in Flight Centre, Australia's biggest travel agent, must be wondering if the phrase 'private equity buyout' is some sort of curse.

For the second time in a year the company has scrapped a private equity deal with local buyout group, Pacific Equity Partners.

Shareholders could be excused if they look occasionally to the sky in wonderment at the failure of these two deals.

But then again they should be thankful because yesterday they learned that FLT shares are worth a lot more than they initially suspected.

The failure of the latest deal had a golden lining.

The first failure was a management proposal to take the company private at $17.20 a share. The partner was to be buyout group, Pacific Equity Partners.

That died recently at a shareholder meeting to vote on a scheme of arrangement. It was rejected by enough shareholders to defeat the idea. Leading the opposition was major holder, Lazards, which held around 12 per cent.

That was defeated in late February. A month later, Pacific Equity revealed that it had not lost sight of winning over Flight Centre when it emerged with another idea.

Rather than a buyout with management, the new plan called for Flight Centre's assets to be sold into a venture with the buyout firm, in return for $1.1 billion in cash.

That helped the company's shares recover from the pounding after the first proposal was defeated, although by the time PEP appeared on March 29 for the second time, the shares were in sight of the $17.20 level.

The joint venture was to fund a stock buyback worth at least $16 a share and Flight Centre would have owned 70% of the venture.

The recent turmoil in credit markets and especially around private equity deals and the financing of them, led some analysts to wonder about this latest deal. However, no-one thought that it would be knocked off because, according to independent financial experts, Ernst & Young, it was too cheap.

But that's what the upshot was from yesterday's surprise announcement from FLT.

The company told the ASX that the PEP deal was "neither fair nor reasonable'', and Ernst & Young had estimated Flight Centre's value at between $2 billion and $2.1 billion. That compared to the value of $1.6 billion placed on FLT by the latest PEP deal.

And why? Because of FLT's "performance for the year, ended June 30".

In a statement to the ASX, Flight centre chairman, Bruce Brown, said:

"While the creation of a leveraged joint venture had the potential to deliver significant benefits to Flight Centre and its shareholders, it was also a highly complex and costly transaction, and the value proposition has become considerably less attractive for shareholders as a clearer picture of the costs of the transaction has emerged.

"Flight Centre founder shareholders, who control more than half the travel agency network's shares, have advised the company they intend to vote against the transaction.

"The company said cost and tax considerations were a major concern and the transaction would have prevented the company returning a sufficient proportion of cash to shareholders.

"A copy of the independent expert's report will be released later.

"Flight Centre has terminated the implementation deed it entered into on June 21."

Oops. Back to the drawing board with the FLT board saying it would "now examine alternative strategies for returning cash to shareholders".

Flight Centre shares fell $1.97 in the immediate aftermath of the news to a low of $17.28. This, before cooler heads prevailed and the shares rebounded to around $18.05 as investors realised that Ernst & Young was effectively saying the shares were worth more than they were yesterday!

The latest PEP deal put a value of more than $16 on each FLT share, but the Ernst and Young valuation put a price of up to $22 a share.

And the stance by Lazards and other shareholders that the first deal undervalued FLT has been strongly vindicated by Ernst & Young.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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