Sabre said in a financial filing this week that it was considering an acquisition to the tune of half-a-billion dollars during the next two months.
You don't need to know how to use an abacus to calculate that Abacus International is a likely target.
For years, Sabre has always had its eye on the Singapore-based global distribution system (GDS), multiple sources said.
Since 1998, Abacus has been a joint-venture, with Sabre owning 35% and 11 Asian airlines owning the rest. Sabre swept in after Abacus dumped Worldspan, its previous technology partner.
Given Sabre's part-ownership, Abacus is unlikely to go up for auction.
The price is right
Sabre’s statement was worded to say the single acquisition would "require approximately $500 million in funds, including advisory and financing costs".
Because Sabre already owns a third of Abacus, that estimate implies a transaction value of $765 million, noted Henry Harteveldt, who runs the consultancy Atmosphere Research Group, in an interview.
Abacus booked $335 million in revenue in 2013, the latest year for data available.
If it buys Abacus, Sabre should find the integration to be relatively easy. Abacus is a marketing layer overtop Sabre’s GDS technology and Web services. Abacus adds a local customization and regionally relevant connectivity and back-office solutions.
Obstacles to a deal
Yet while integration might be easy, persuading 11 airlines to agree on any sale has proven to be as difficult as herding sheep.
The airlines have a central reason to resist.
They enjoy a sweetheart deal with Abacus in which the GDS charges a lower transaction fee for domestic bookings completed through it than any rival GDSs charges (except for China's state-owned GDS Travelsky), said Ellen Keszler, who runs the consultancy Clear Sky Associates in Dallas.
Yet the airlines might be convinced to sell regardless.
Sabre could negotiate attractive transaction terms, perhaps by promising to continue the discounted fees for domestic transactions and adding a promise for discounts on international ticketing. Harteveldt said:
Airlines might also want to consider whether they really want to have a large ownership stake in a technology company or to instead take the cash for core business concerns or to pay down debt.
The biggest airline in the consortium controlling Abacus is Cathay Pacific, which has been struggling of late. Another joint venture partner that could use some cash is Malaysian Airlines, hurt by a recent aviation disaster.
A strategic move
The main thing Sabre would get from a deal is the ability to kickstart Abacus's metabolism to make it more competitive regionally.
Abacus has lost significant Asia Pacific market share to Amadeus, and to a lesser extent to Travelport, in recent years. This trend has been blamed on the airline owners’ lack of focus and lack of interest in re-investing profits in growth.
Sabre might be willing to match Amadeus’s higher level of incentives to travel agents, speculates one former executive.
The technology giant's goal would be for incremental revenue in Asia at the expense of its two other rivals -- Amadeus and Travelport, said one person who spoke on the condition of anonymity because Sabre’s interest was meant to remain private.
Since Robert Bailey became Abacus’s CEO in 2008, the company has doubled its turnover. But that growth has been on the back of the rise of travel in Asia generally.
Bailey’s key reform has been to change the business mix from being an airline office-type support tool to being a channel to market to more than 20,000 travel agents across Asia Pacific.
Asia Pacific still conducts a higher volume of transactions through travel agents for flights on legacy carriers than is common in the US or Europe, particularly because of China's market being old school.
Abacus's ground game is impressive for this kind of transaction. Unfortunately, this kind of transaction is declining as an overall share of the market.
Low-cost carriers (LCCs) comprise half the capacity and about 13% of the revenue volume in Asia Pacific but their sales haven't yet been captured much by Abacus or the other GDSs.
A Sabre overhaul of Abacus might enable the company to focus more effectively on capturing that LCC business. Its current legacy carrier co-owners hinders an LCC push.
Bailey was not available for an interview because he is traveling this week. Perhaps by coincidence, some Abacus and Sabre Pacific staffers are visiting Dallas for internal meetings this week, Tnooz has learned.
An Abacus deal isn’t certain
Sabre's announcement of a likely acquisition was not unexpected. In his 18 months on the job, Sabre CEO Tom Klein has shown himself to be more of a take-no-prisoners-type of leader than his predecessors, according to Keszler and a few staffers.
Growth through acquisition has been one of his stated goals to the five key members of his corporate development team, these sources said.
Yet an Abacus acquisition would not be entirely consistent with the story Klein has been telling investors.
When Sabre had its IPO in April 2014, it sold Wall Street a story of growth primarily through its hospitality services division, which had the highest margins of all its divisions.
An Abacus deal would mean Sabre is doubling down on its traditional, low-margin, air GDS business, which would run counter to the narrative.
Sabre might try to persuade investors that an Abacus acquisition is a way of entering the lucrative China market, given China’s buzzy appeal. Yet the reality is that China would be a long-term play.
The potential slice for foreign GDS companies today represents less than 5% of TravelSky’s segments, as China continues to want to have national control over domestic air distribution.
Last night, Abacus declined to comment about Sabre’s rumored tire-kicking. Sabre also declined to comment.
Earlier today, The Beat was first to report sources saying Sabre is eyeing an Abacus deal.
Other acquisition targets
Sabre might be considering other options in a similar $500 million price range.
Sabre’s hospitality sector is its fastest growing division. Buying a provider of a competitor with a leading computer reservation service (CRS) might make strategic sense, said one former Sabre executive.
Sabre has about a third of the hotel CRS market.
The next largest share is held by Micros, which has about 20% market share, and which was acquired by Oracle last year for $5.3 billion. (To explain that market value, the CRS business is only a slice of what Micros does.)
The next biggest hotel CRS provider is TravelClick, which was acquired by private equity firm Thoma Bravo last year in a deal valued at $930 million. Thomas Bravo “jumped the auction”, in which Sabre was one of several prospective bidders, according a person with direct knowledge of the talks.
TravelClick’s hotel marketing side could dovetail in a complementary manner with Sabre’s operations, says an executive with one of the companies. But an asking price of roughly $1 billion exceeds what Sabre has outlined it is expecting in the near-term as a deal.
Another leading CRS provider is Trust International, which is owned by venture capital firm Battery Ventures. Yet privately held Trust is not likely to earn enough to merit a $500 million price.
NB: Abacus mouse image via Shutterstock.