<B>Navigant Nabs Sato</B>
By Megan Hjermstad
<I>Denver - </I>Navigant International last week announced it entered into a definitive agreement to acquire Arlington, Va.-based SatoTravel for $45 million, a deal that would position Navigant to challenge Carlson Wagonlit Travel as the second largest travel management company behind American Express. Navigant said the combined company would have approximately $4.2 billion in annual gross airline ticket sales.
Navigant's acquisition of SatoTravel is a new direction for the rapidly growing travel management company. Historically, Navigant has acquired small regional agencies that complemented its business strategy to cater to small to midmarket clients through local offices. SatoTravel, which specializes in providing travel management services to the federal government and military sector and to several large corporations, will diversify Navigant's client base, allowing it to leverage Sato's call center capabilities and broaden its international presence.
"Part of the beauty of the combination is that we will still focus on the midmarket customers and dedicated onsites, but we now have the capability and opportunity to offer large call center support, as well to take some of the cost out of the transaction," said Ed Adams, chairman and CEO of Navigant. "It is an opportunity to really offer a lot more to our customer base. For those who want to work in a call center environment, we will be able to leverage this relationship."
Conversely, SatoTravel's large clients will benefit from the local offices and customized onsite expertise that Navigant delivers. "We will probably end up finding some synergies in large corporations that have a substantial amount of business in call centers, but have a need for local service. Navigant will be much better suited to provide that local onsite service. It will make them more generally competitive," said Mike Premo, vice president of strategic relationships for SatoTravel.
Though the different client bases could bring potential synergies, those areas have not been thoroughly explored. "The number of people aware of the deal didn't permit a lot of conversation about where synergies could occur. This consolidation type activity really requires deep involvement across the organization," Premo said.
Navigant said it will focus on consolidating those functions that don't touch the customer, such as back-office accounting and adopting best of breed solutions and practices based on both companies' current operations.
Under the terms of the agreement, SatoTravel's management team will stay onboard and Lawrence Hough, co-chairman and CEO of SatoTravel, will join Navigant's board of directors, increasing the size of the board to six members. Hough will retain operating responsibility for SatoTravel, which will act as a subsidiary of Navigant. "He is a great addition. We look forward to his help and guidance. He will be helping with integration and consolidation and melding two companies and cultures together," Adams said.
Navigant will bring on SatoTravel's client base, two-thirds of which is government and military and one-third of which--less than a dozen clients--is corporate. However, John Caldwell, president of Caldwell Associates, questioned the profitability of the government market in general. "It is a very low-end, high-cost, low-profit margin business. The government can be an unreasonable, demanding customer," Caldwell said.
Nonetheless, Navigant's decision to expand its business model to include government entities may give it greater security at a time when many corporations are reducing business travel. "Government business is fairly noncyclical. It's kind of nice to have some of that insulation," Adams said.
Navigant paid more than twice the amount for Sato than for any of its 35 prior acquisitions since 1997. The $45 million transaction, which is expected to close later this month, will consist of $27 million in cash and around 1,469,000 shares of Navigant common stock, valued at $12.25 per share. The agreement also provides for an additional $4.8 million payment of cash and stock, if SatoTravel achieves certain revenue objectives by one year after the closing.
As the only publicly traded travel management company, with the exception of American Express, Navigant has had to lobby to get Wall Street to follow and appreciate the nature of its business. "It is the public travel service company. Others are trying to go public but Navigant created the path. Public companies and the employees of them have a somewhat different burden. It's an important change for us," Hough said.
The deal with SatoTravel may bring Navigant the greater analyst coverage and higher stock valuation it has been seeking. R. Bailey Dalton, vice president for C.E. Unterberg, Towbin in New York, which initiated coverage of Navigant earlier this year, said that the introduction of 1.5 million Navigant shares in addition to its existing 12 million shares outstanding will bring more Wall Street attention to the company. "When the deal closes and another 1.5 million shares help the market cap continue to rise, a larger portion of the investment community will be interested," said Dalton. "It isn't as easy to get a salesforce after it, even if it is a focused stock, because investment banks have certain cutoffs in market cap size."
Navigant's preliminary guidance is that it expects SatoTravel to be neutral to earnings per share for the remainder of 2001 and $.05 accretive in 2002. CIBC World Markets estimated that the transaction will be at least $.07 accretive to 2002 earnings. "Traditionally, Navigant has been conservative. In general, I see more accretion than they are initially expecting," Dalton said.
Meanwhile, Navigant and SatoTravel will look to leverage their combined volumes for sweeter supplier agreements. "I'm looking forward to stronger vendor relationships," said Hough. "When you are number seven or eight. you always feel like those ahead of you are getting better deals. That number two speaks volumes about the relationships we are looking to enjoy. It is a big win for our current customers."
However, Caldwell was skeptical that aggregating volume could result in sweeter deals for any agency. "It is not clear that putting large volumes together for the purposes of override agreements will result in a major revenue stream," said Caldwell. "The airlines are trying to get out of overrides and mostly looking at deals coming from the customer.