Cendant Set To Seize Galileo

<B>Cendant Set To Seize Galileo</B>

By Jay Campbell

<I>New York - </I>Corporate travel managers struggled to assess the impact last week of Cendant Corp.'s announced acquisition of Galileo International, expected to close this fall. Many Galileo customers foresee little impact on their business--that is, unless Cendant buys Worldspan, too.

Though Rosemont, Ill.-based Galileo's customers and agency subscribers tended to be happy that the company found a buyer, they strained to find an angle on the news that is relevant to the particulars of corporate travel management.

"I hope it will provide Galileo with additional capital, but there is no immediate impact on us as a corporation," said Jeff Kurn, global strategic sourcing manager at Hewlett-Packard in Palo Alto, Calif.

Several other buyers expressed similar views, though some were intrigued by how the acquisition fits into Cendant's overall strategy. The company owns Avis, WizCom and a handful of lower-end hotel brands. Cendant also offers real estate and tax preparation services, fleet leasing and fuel cards, mortgage origination and employee relocation.

Referring to Cendant chairman, president and CEO Henry Silverman, New York-based Pfizer Inc. manager of corporate travel Phil Dunphy said, "He has a vision and I'd like to know what it is."

Dunphy said the acquisition could represent a new dynamic in his company's relationship with Galileo and add a new facet that he would take into account in "possibly taking that relationship further."

Corporate buyers wondered whether Cendant would begin bundling deals for, say, Avis and Galileo, much like airline GDS owners past and present did and do with their corporate clients. But Cendant executives cautioned that "bundling" may go too far.

"I don't like that word," said Sam Katz, Cendant chief strategic officer. "The point more is about leveraging relationships. As people have more complex business needs, they see value in a broader and deeper relationship."

Noting that Galileo had lost momentum because it "had no sales force for almost 14 months," due to a well-publicized bust-up with its airline owners in 1998, Silverman last week told Wall Street analysts, "We will address that issue."

"We're still refining our thinking on sales, but we do have a number of different business units in Cendant calling on travel agencies or corporations. We think that it makes sense for all of the people representing various products to have Galileo in their toolkit," said Mark Miller, who is president and COO of Cendant's travel division. "We would see lead-generation opportunities."

Asked whether that means an Avis sales representative would earn commissions on Galileo, he said, "If it made sense we would do it."

"When you talk about bundling, it speaks to somehow bundling our products in a way that would disadvantage other suppliers," said Miller. "We have no intention of doing that."

"Whether or not they can legally bundle, there still is a synergy there," said Dunphy. "There is no doubt that companies do try to bundle."

More for travel agencies than for corporations, the acquisition certainly will impact many GDS relationships. Larry Austin of Austin Travel in Melville, N.Y., said he was keen to find out what his GDS provider, Sabre, will do in response. "This is an interesting change in the industry right now," he said.

Cendant also said it has no intention of biasing the display of its travel brands in the Galileo GDS.

Asked if the U.S. Department of Transportation's CRS rules that forbid such practices--which address airline owners of the GDSs--could be interpreted to apply to Cendant, Galileo chairman, president and CEO Jim Barlett said, "I would only speculate but couldn't answer whether the CRS rules apply to non-airline owners."

At the very least, one analyst noted that the Galileo GDS could become a preferred channel for Cendant to sell distressed inventory, as it plans to do at Galileo's trip.com online consumer travel agency.

One advantage Galileo gains as part of the acquisition will be the conversion of 5 million annual leisure-related segments generated by Cendant's membership business to Galileo from Sabre. Although 5 million new segments will do little to solve the erosion of Galileo's market share--the GDS booked well over 300 million segments in 2000--Cendant plans to help finance acquisitions by travel agencies willing to move business to Galileo.

"Say you are a travel agency client of ours and you want to buy another travel agency," said Silverman. "We could lend you $20 million at 10 percent, but by converting the agency to our GDS, our return is instead 45 percent on that $20 million loan. We have a lot of free cash flow with very high returns."

"That's nothing new," said Dan Bohan, COO for Fairfax, Va.-based Omega World Travel, who said he was happy for Galileo. "Galileo and the others have been doing that all along."

Bohan said the incentives GDSs pay to travel agencies often have been used for consolidation. Those subscriber incentives have increased markedly in recent years, with Sabre's rising to $80 million in 2000 from $70 million, $38 million, $36 million and $31 million in the previous four years.

Galileo and Cendant cited other advantages for Galileo as well, including plans to bolster trip.com with content Cendant had been planning to include in a travel portal, the addition of "a bunch of new customers" to Galileo's network subsidiary, Quantitude, and a new CEO as Barlett will be replaced following the close of the deal.

Cendant said it will continue with Galileo's plan to release its corporate online booking tool, Corporate Travelpoint 2.0, later this summer.

Perhaps most importantly, the acquisition ensures Galileo's future "as a continuing operation," said Merrill Lynch analyst Jenny King, who is based in San Francisco. "It's better that they found a strategic buyer who wants to leverage the asset, rather than if someone just used it as a cash-flow play. Galileo doesn't really gain a new weapon in competition with Sabre, but they will benefit from a new and possibly better management."

According to travel technology vendor and pundit Richard Eastman of Newport Beach, Calif.-based The Eastman Group, "I have long indicated that Galileo would need to find a buyer because they lacked any kind of realistic strategic direction for so many years. Galileo is down to short strokes--already being surpassed in the United States by Worldspan in segment revenues and eroding fast in Europe--with no strong Asian outlets and minimal market penetration in the Middle East.

"Cendant, on the other hand, has done little better," Eastman continued. "They, too, are tied to legacy architectures, legacy cultures and had seemingly implemented start-and-stop IT initiatives for the past five to seven years that I've been watching them. Galileo may be the 'binding' link that would bring all the disparate parts of the Cendant IT structures together--but that would be a wrenchingly difficult political process. It would surprise me that Cendant could get the much-needed consensus internally to enable that to happen."

According to Belmont, Calif.-based TravelTechnology.com president Norm Rose, "Galileo is very conservative in their execution, and I don't know if that will change. Their weakness always has been in the execution and positioning to fight the marketing machine at Sabre. Still, this should ease the market on the fear that something will happen to Galileo."

New York's CIBC World Markets analyst Paul Keung echoed those views, noting that the new management "inherits the same problems that plagued Galileo management in the past, including market share losses, legacy businesses and relative lack of an Internet booking presence."

Executives with the two companies addressed Keung's last point, claiming that the combination of trip.com's technology and Cendant's marketing clout will create a formidable alternative to both Expedia and Travelocity.

"We are not naive to the challenges of the GDS industry generally or to Galileo specifically," said Silverman, referring, in part, to the threat of GDS bypass. "There are clearly challenges, but that means opportunity."

As for what Cendant gets for its $2.9 billion purchase price, the company said the acquisition will be immediately accretive to its earnings and cash flow, adding roughly 10 cents to 14 cents to Cendant's 2002 earnings per share.

Silverman called Galileo "highly complementary to our fee-for-service model" and noted that it would allow Cendant for the first time to generate revenues from air travel, a significant business in which it has never been involved. He anticipated merger synergies of $70 million to $80 million in 2002 and more than $100 million in 2003, primarily through increased usage of Galileo's GDS and other technologies. The transaction also is expected to increase Cendant's free cash flow by about $350 million to $400 million in 2002.

Cendant said it plans to make no divestitures following the deal and anticipated neither a change in Galileo's operational management nor a reduction in the employee base that would impact customer service.

United Air Lines Inc., Galileo's largest shareholder, agreed to support the transaction by selling its share. Omega's Bohan viewed the severing of the Galileo-United tie as a potential downside for Galileo, but Silverman assured analysts that "We expect to enhance" that relationship.

Cendant executives would not comment on reports that they also are considering the purchase of Worldspan, but there are a number of contingencies in the Cendant-Galileo agreement that would protect Galileo shareholders from any delay resulting from regulatory scrutiny, particularly if Cendant acquires another GDS.

"We don't know if there will be another, but it's prudent to account for contingencies," said Silverman.

Said Keung, "He needs to address Worldspan shortly, because that could potentially delay the closing of Galileo.