From left to right: Emmanuel Gueroult and Christian Lucas
With a hugely turbulent economic backdrop threatening to throw the airline booking operator Amadeus's IPO off course, its Morgan Stanley team had their work cut out to launch the first such European venture since 2008 to be in excess of €1bn. Writer Edward Russell-Walling
To say that April's initial public offering (IPO) from Amadeus, the airline booking and IT business, encountered a spot of turbulence does not quite do it justice. The deal managed to survive the Greek crisis, the failed IPO of its closest rival and the volcano that shut down Europe, and still landed safely. That's nifty flying.
Amadeus operates the travel industry's largest 'global distribution system' (GDS), handling seat reservations for more than 460 airlines as well as providing a range of other IT services to carriers. It was formed in 1987 by Air France, Iberia, Lufthansa and SAS, and the first three still have minority stakes in the company.
The April deal was not the first Amadeus IPO. The original GDS operators - which included Sabre and Galileo - skewed bookings in favour of their owner-airlines, which prompted pressure from regulators for them to be hived off. Amadeus was floated on the Madrid stock exchange in 1999, valued at about €3.4bn.
Private move
The bursting of the technology, media and telecoms bubble in 2000 was followed by 9/11 and a fall in air travel, both of which clobbered the shares. Even when markets began to rally, a fear that growing internet use would hurt Amadeus continued to depress the share price. So it was taken private in 2005, when BC Partners and Cinven took a majority stake, valuing the business at some €4.4bn.
As is the way with private equity investment, the new majority stakeholders had their eye on the exit even then, and in September 2009 they began the process of selecting advisers for an IPO, once again on the Spanish market. The mandates for global coordination and joint bookrunning were enthusiastically contested and eventually awarded to Goldman Sachs, JPMorgan and Morgan Stanley.
The runway ahead was not exactly marked out with flashing lights. There were six different parties represented on the selection committee - BC Partners, Cinven, Amadeus itself and the three shareholder airlines. "It was a big room," says Emmanuel Gueroult, Morgan Stanley's co-head of equity capital markets for EMEA. "Different parties would have meant different views on the IPO and on its structure, as we usually see in a multi-party mechanism. But there was an exceptional sense of co-operation and cohesiveness - which was needed, as the IPO market was just reopening and hadn't been tested, and investors didn't know what they were willing to pay."
Market leader
The business that the bankers undertook to sell was not entirely the same business that had been taken private five years earlier. Then, Amadeus was principally a GDS entity. It had now grown to become market leader, with 37% of world market share, ahead of Sabre and Travelport (owner of Galileo) with 29% each. Then, it had a fledgling second business line - an IT suite that could be used by airlines for a variety of operational and administrative tasks. But by 2010, this accounted for 30% of sales, with customers including British Airways and Qantas.
The financial sponsors had embraced this part of the business plan and supported it through the cycle, recognising it as a valuable diversification from the main business.
The airline IT business model is based on a fee per passenger boarded and, likewise, the GDS charges a flat fee per transaction. "The GDS activities are transaction-based, and decorrelated from the airline business," says Mr Gueroult who, like some of his colleagues, had advised the financial sponsors on their original investment back in 2005. "Many of the contracts are long-term. And the more functionality airlines have with Amadeus, the more embedded they are with the company."
As 2010 began, the mood was optimistic. "A lot of sponsors were ready to launch IPOs on the back of year-end results," says Mr Gueroult. "And that included us. But by February the secondary market had become very shaky, with worries about sovereign risk in Greece, and a number of significant IPOs were pulled."
Crucially, one of them (planned for London) was one of Amadeus's rivals, Travelport, majority-owned by private equity group Blackstone. The Amadeus team had been hoping to launch in February, and were disconcerted to see Travelport leap in ahead of them, with Credit Suisse, Deutsche Bank, UBS, Barclays and Citigroup as joint bookrunners. When pricing fell significantly below the initial range, the Travelport transaction was pulled.
That disconcerted the Amadeus team even further. "The fact that it didn't succeed was not good for us," says Mr Gueroult. "Management and shareholders collectively decided with the joint global coordinators not to launch. Market conditions did not properly reflect the quality of the asset."
But the team was convinced that Amadeus was a better asset than Travelport for a variety of reasons, apart from its market share. As they subsequently explained to investors, one was the IT business. Another was the fact that it owns its data centres. "This vertical integration may require more upfront investment than, for instance, outsourcing, but it ultimately means higher quality, leading to better pricing," says Christian Lucas, Morgan Stanley's head of technology investment banking for EMEA. The company had also rewritten all its early reservation code - again, very costly, but providing substantial flexibility and scalability benefits.
In what was to prove a relatively narrow window, jitters over Greece began to settle. A number of IPOs came to market, performing well in a more stable secondary market. The Amadeus IPO process finally went ahead a month later than planned, with the publication of research and the start of pre-marketing towards the end of March. About 27% of the company was for sale. Of the shares on offer, 63% were new and 37% were being sold by existing shareholders. The initial price range was €9.20 to €12.20 per share. With gearing of 3.25 times, deleveraging at 0.7 per year, Amadeus was less leveraged than Travelport. Another important differentiator was the choice of industry peers. Travelport had opted to list under London's business services sub-index, alongside stocks such as Capita (outsourcing) and Experian (credit checking). Amadeus chose to compare itself mostly with US data processing companies such as Visa, Mastercard and Western Union - as well as Experian. "That positioning helped our success," says Mr Lucas.
Volcanic intervention
The roadshow began in mid-April. Right on cue, ash from Iceland's Eyjafjallajökull volcano began to cause havoc with European air travel. The Amadeus CEO and CFO were, thankfully, already in London, and meetings were able to be held in Madrid and Paris. But trips to the US and the Middle East were out of the question. Apart from the disruption, some investors were worried about the effect on Amadeus's business.
It was around the same time that the SEC accused Goldman Sachs of fraud, adding to the general air of anxiety. But the orders were coming in. By the time the deal was priced, on April 27 at €11 per share, the offer was four times oversubscribed. With 56% of demand coming from long-only investors, the quality of the order book was pleasingly high.
"Some of the highest-quality orders came from investors to whom the investment case had been presented two or three times - during pilot-fishing, pre-marketing and the roadshow," notes Mr Lucas. "Technology businesses are more complicated to analyse. One key to success is having the process and the discipline to explain the proposition thoroughly and, if needed, more than once."
The highest demand came from the UK (43%), US (27%) and, unusually, France (11%), while home market Spain (2%) disappointed, as did Germany. The stock traded up to €11.90 on day one, and later hovered around the €11.50 mark. It raised €1.32bn and valued the company at €4.9bn. The pricing represented 8.3 times 2010 earnings before interest, taxes, depreciation, and amortisation (Travelport had bombed at 7.4 times).
It was clear that the owners had to leave some meat on the bone for investors to get the deal away. Nonetheless, it was a cheering sight for the market, being the first European IPO in excess of €1bn since 2008, and the largest European technology IPO since T-Online in 2000.
"In the current environment, for a business model like this, the fact that the transaction got done, the way it priced and the way it performed in the aftermarket tells us that investors do differentiate," says Enrique Perez-Hernandez, the Madrid-based Morgan Stanley managing director responsible for origination and execution. "If they take the time to understand the fundamentals, they will take a long-term view and stick to it."
