Right atop Travelocity.com's (TVLY
) home page, you'll see the online travel agent's name and, below it, "A Sabre Company." That's because Sabre Holdings (TSG
), which runs the world's leading travel reservations network, owns 70% of Travelocity. Yet as holders of the other 30% are now learning to their dismay, owning part of a Sabre company and being partners with Sabre are not, in fact, one and the same.
A paradox? Yes, and it's one worth pondering if you hope to stay on top of the risks to your portfolio that Wall Street never tires of cooking up. Egged on by investment bankers, more and more companies spin off units in partial public offerings. Nestlé (NSRGY
), for example, is set to sell 25% of its eye-care business, Alcon, (Barker, Mar. 18) while Citigroup (C
) is offering 20% of a Travelers insurance unit. Executives love these deals because they raise cash and often boost the parent company's shares.
For public investors, these offspring carry a decided risk. Any of the plaintiffs in the raft of class actions filed against Sabre and Travelocity could tell you all about it. Sabre, itself a spin-off from American Airlines' parent AMR (AMR
), spawned Travelocity's Web site in 1996. But Travelocity shares didn't start trading until March, 2000--just as the Nasdaq hit its peak. Since, the shares plunged and never fully recovered (chart).
Now, Sabre wants to buy back the 30% of Travelocity it doesn't own. Why? "It makes sense to combine the companies and to optimize the investment opportunities," a Sabre spokesman told me. So, on Mar. 5, Sabre formally offered $23 a share in cash. Since Travelocity closed near 19 the day before Sabre disclosed the possibility of its offer, and because Travelocity is less profitable than archrival Expedia (table), Sabre sees 23 as a fair price.
The trouble with this assertion--and what makes these spin-offs risky--is an inherent conflict of interest. It's the parent company's duty to make deals on the best terms for its own shareholders--not for investors in the spin-off. In Sabre's case, once it decided it wanted to own all of Travelocity and capture for itself all of its future potential, its objective became to acquire the shares as cheaply as possible. Suddenly, Travelocity's minority investors found themselves on the opposite side of the bargaining table from their "partner," Sabre.
The way these deals usually play out, minority shareholders don't sit at the table alone. They're joined by the spin-off's independent directors--that is, those unaffiliated with the parent. At Travelocity, just three of the nine directors are independents. Two of them, F. William Conner, CEO of Internet security outfit Entrust, and travel industry consultant Kathy Misunas, make up a special committee evaluating Sabre's bid. Their adviser, Salomon Smith Barney, put Travelocity's value at 30 to 55. The independent directors then labeled 23 as "inadequate."
When or at what price a deal will be struck is impossible to know. Neither Conner and Misunas, nor Sabre's CEO, William Hannigan, are talking. Yet odds are Hannigan will prevail. Sabre has more leverage as it revels in a buyer's dream: one bidder, with lots of inside information. And Hannigan is more motivated than Conner and Misunas, both of whom have day jobs and whose latest disclosures show they own just 5,000 and 1,000 Travelocity shares, respectively. Given that Misunas spent 22 years at AMR and from 1993 to 1995 was Sabre's CEO, it's even fair for shareholders to wonder where her true loyalty lies.
If Travelocity goes private, some investors won't be happy at any price. They will be frozen out of any future gains and--salt in the wound--some will owe capital-gains taxes. The best cure for this kind of worry? With spin-offs that leave minority investors vulnerable, just say no.
Copyright 2002, Bloomberg L.P.
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