Why Corporate Travel Management bought a loss-making business in the middle of a pandemic

It took a seven-year courtship for Corporate Travel Management (ASX: CTD) to seal the deal on its acquisition of US-based Travel & Transport (T&T), as shareholders dig deep into their pockets to bet on US market revival.

As noted in yesterday's announcement of the $275 million takeover deal, T&T has been losing money every month but Corporate Travel Management (CTM) CEO and founder Jamie Pherous is bullish on its long-term prospects.

"We've always thought that they were the best business that we know of in North America. We've been talking to them for many years and they've always said politely, "thank you, but no thank you"," Pherous tells Business News Australia.

The tone of conversations changed with the onset of COVID-19. Pherous clarifies T&T didn't need to be sold but it would have needed to look for debt.

"The businesses would have never sold otherwise," says Pherous.

"The reality is businesses like T&T would have always commanded 11-12x EBITDA in the good times. We've got a strong view that travel is going to come back, and we've got a strong view that we want to be overweight North America because that's the global feeder market for corporate travel."

The management teams of both companies discussed the pros and cons of linking up, and reached the consensus CTM's technology would benefit T&T's North American clientele while the Brisbane-based company would benefit from the expanded geography and market niche.

"We also agreed the timing right now was really good because it is quiet. You can get a lot of integration done very swiftly when connectivity's down, and that might be a very small window," says Pherous.

The CTM executive is also very optimistic about what T&T's hotel program Radius will bring to the business, in terms of the four and five-star hotel options it will provide to existing customers, as well as new revenue streams.

"What we also love about it is the other great agents that are part of that buying group. That means we have the opportunity to put some of our really great hotels in the Asia-Pacific into that program, and also push that program back through our booking tool in the content.

"From the point of view of a hotel program, it pushes us three years forward of where we were going to be, which is exactly where we want to be."

He says the combined companies on an FY19 basis would have total transaction value (TTV) approaching $11 billion, and an EBITDA with expected synergies at more than $216 million.

"We've got a real chance to do what we wanted to do, which is be a business over $10 billion making a quarter of a billion. This acquisition gives us the opportunity to achieve that goal," he says.

Incentivising US leaders for growth 

Another critical element of the deal is the retention of key personnel at T&T by giving the company's executives $4.5 million in CTD shares, which forms part of the $275 million consideration.

"T&T was an employee-owned company so no one person had a very large shareholding. In fact, the largest shareholding of anyone out of the 200 is roughly $5 million, so what that means is no one's got what you'd call retirement money," says Pherous.

"What was very important in this deal is that we have the people we want to take stock in this business, which they have, because they see the same benefit as we do - when things come back and we execute, clearly the company is going to have a hell of a lot more value than it does today," he says.

"Secondly, we work really hard with Kevin [O'Malley, T&T CEO] who will become the CEO of North America for us on long-term incentives and other mechanisms at CTM that have been very successful for us.

CTM announced this morning it had successfully raised $262 million under the institutional offer, with a further $113 million expected to be raised in the retail offering starting on 6 October.

Pherous explains he is not personally participating in the capital raising only because he "can't afford to".

"I think I'm one of the lowest paid leaders in the ASX, which I think the shareholders like," says Pherous, who earned $436,010 in FY20, representing a drop of 32 per cent year-on-year.

"I get all of my revenue from CTD primarily out of dividends and stock appreciation.

"I've got over 21.5 million shares, so clearly for me this is such a good deal that I'm very confident the stock price will appreciate because of this deal, and for me that's a lot more material."

At the time of writing he isn't wrong. Despite the capital raising offering a 16 per cent discount on the last trade at $16.16 on 25 September, this morning the share price has surged 11.26 per cent to $17.98.

Business News Australia