Will innovation and marketing take a back seat at European online travel agency Opodo, now that it has been acquired by AXA Private Equity and Permira Funds?
If historical trends hold true, then the financial concerns of these private equity owners, who bought Opodo from Amadeus for Euro 450 million, likely will take priority over a focus on transforming Opodo into an enhanced consumer business.
Those conclusions can be drawn from a fascinating -- if concise -- new PhoCusWright Financial Spotlight report called Opodo's Financial Engineering Threatens to Reinforce the Company's Laggard Status.
Written by Timothy Mullaney, the report is especially interesting because of its analysis of the track record of the private equity crowd in online travel. Among the highlights:
- The IPO of Orbitz Worldwide, which was spun off from Blackstone-controlled Travelport in 2007, was a "dud," with shares now trading under $4, down from $15 at spinoff. More importantly, Orbitz Worldwide "searches for a way to keep pace with Expedia and with Priceline's rocket-like rise," the report says.
- Orbitz and Travelocity, which is part of Silver Lake- and TPG-owned Sabre, have seen their market share decline since parents Travelport and Sabre, respectively, were underwent leveraged buyouts.
- Expedia had virtually no debt on its books when it held sway over the online travel industry during the early portion of the past decade. However, Expedia lost its mojo from 2003 to 2005 when it was in the hands of the ever-acquiring IAC/InterActiveCorp, and Expedia's shares have dipped about 12% since it was spun off in 2005 for a second time.
- The woes of online travel agencies under private equity control contrastly sharply with publicly traded Priceline, which has grown dynamically, partially on the back of its $133 million acquisition of Booking.com in 2005. The PhoCusWright report characterizes Priceline's balance sheet as "pristine" with the relative absence of long-term debt.
And, it's undeniable that Priceline management is widely respected in the online travel industry for its ability to focus, particularly on its hotel product.
With this historical track record, there's little ammunition in the Opodo deal to provide confidence that the European OTA will become "a more attractive partner for the travel industry, a more innovative or useful site for consumers, or an attractive public investment if Permira and AXA eventually exit through another IPO," Mullaney writes.
The report adds: "The problem is straighforward: Growth companies in online travel need exactly the traits private equity and rollup acquirers traditionally value least: innovation and marketing. When online travel companies are at their most vibrant, they have used relatively little financial engineering."
The report portrays Opodo as being subject to "neglect" under Amadeus/private equity stewardship. Although profits at Opodo escalated at the behest of Amadeus' private equity and airline owners over the years, Opodo invested little in new products and marketing, and its websites have largely gone unchanged since 2006, Mullaney writes.
Opodo spins off enough cash to meet the financial priorities of AXA Private Equity and Permira Funds, the report argues.
But, where does that leave Opodo in terms of being a viable competitor in the European online travel agency market? Although Opodo has a strong position in the European market for flights, it has yet to make its mark in the all-important hotel business.
"Ultimately, both emerging players and the giants will likely outperform Opodo by moving more nimbly and boldly in the ever-evolving consumer marketplace, all while Opodo focuses on holding down the financial fort," the report says.
Opodo could not be immediately reached for comment.