1. What characteristics make this an attractive leveraged buyout? 2.What are the specific risks and benefits of each of the two strategies? 3. Which strategy should they propose and why? 4. Auction dynamic: how should they position themselves to win the deal? 5. How can BC Partners differentiate themselves from other bidders? The Buyout of Amadeus Global Travel Distribution In October 2004, BC Partners, a European private equity fund, was contemplating bidding for Amadeus Global Travel Distribution, S.A. - a major information technology player in the global airlines and travel industry. Amadeus had three lines of business: 1. A global distribution system (GDS): a computerized system that enabled airlines and other travel service providers to distribute flights to a large selection of travel agents and ticket offices, and provided information about schedules, seat availability and fares; 2. Airline IT Solutions: complementary services mainly in reservation and sales management (147 airlines outsourced this function to Amadeus in 2004), inventory management and departure control systems, 3. E-commerce: a booking engine provided to online merchant sites to allow them to connect to the GDS. Amadeus also owned minority stakes in a number of online travel agencies. In June 2004, it acquired a majority stake (55%) in Opodo, Europe's largest online travel agency. Listed on the Madrid, Paris and Frankfurt Stock Exchanges, it was one of four major global industry players, and regarded as co-leader thanks to the quality of its technology and its vast database of airlines and travel agencies. The company's share price, however, did not seem to reflect its solid market position or financial standing. Floated at 6 per share by the four founding airlines on the Madrid stock exchange in October 1999, the stock had traded up to a maximum of 16 in the early months of 2000, but had then followed the general downward trend in the European exchanges and the IT sector, stabilizing around the 5 - 5.5 level. The day before the interest of financial investors became public (13th August 2004), shares were trading at 4.92. Once rumours of a possible public-to-private transaction reached the market, they traded up to 6.38. Whatever the final bid for the company, a premium over the current price had likely to be paid (see Exhibit 1 for recent bid premia). In view of this valuation, BC Partners saw an interesting investment opportunity, particularly given Amadeus' attractive growth track record, strong management team, close-to-zero debt and consistent cash-flow generation - operating cash flow was expected to reach more than 400 million in 2004. In many respects Amadeus appeared to be an ideal candidate for a leveraged buyout (LBO). The Target: Amadeus The global travel distribution company was founded by Air France, Iberia, SAS and Lufthansa in 1987. From the outset, it had delivered a robust financial performance, benefitting from the sustained growth in air travel worldwide - a trend that analysts expected to continue. Averaging a growth rate of 6.7% over the last four years (2000- 04), EBITDA margins had improved by 2.7% during the period. Over the preceding years, a series of crises had hit the global travel industry, including the wars in Iraq and Afghanistan, the 9/11 terrorist attacks, and the avian flu epidemic in 2003, sending air traffic volumes into a tailspin, but the company managed to sustain its impressive growth. Its leading market position was also protected by high barriers to entry (mainly the difficulty of replicating the technology and the network effect). In 2004, Amadeus held a leading competitive position in the global GDS market with a 29% share. Its market share ranged from over 50% in Western Europe (94% in Spain, 80% in France and Scandinavia, and 75% in Germany) to slightly less than 10% in North America, where its three major competitors were based. Its leadership in the GDS and airline IT solutions space was attributed to: Continuous investment in technology since 1988, which put it well ahead of the competition in terms of technical architecture and the efficiency of its IT systems. Among its rivals, Amadeus had the clearest path to integrating more robust and flexible open-source operating systems (as opposed to closed-source "legacy" IT systems). Outsourcing contracts signed with major airlines for Airline IT Solutions, such as the highly acclaimed migration of Qantas inventory management, a critical airline system, in October 2004. Notwithstanding, its Airline IT Solutions business was still in its infancy. In 2004, the majority of clients had only recently been acquired and it was still in the pilot phase. A major advantage of the Amadeus business model was its scalability. The company's cost and capital base were relatively fixed, which meant that additional booking volume meant wider margins and faster cash generation. Founder and CEO, Jose Antonio Tazon, and the members of the Executive Committee, were regarded as pioneers in the industry. Most had been with Amadeus from the start (average tenure was 15 years). Pre-Acquisition Challenges Several challenges were identified by the BC Partners deal team: . Given the complexity of the business, it was vital to have a top management succession plan and ensure that successful managers stayed with the company. Keeping the four airline owners 'onside' was equally important, as they were likely to remain minority investors with rights that protected them strategically, such as to veto the company falling into the hands of a competitor. The business model had to adapt to new trends: a new revenue stream had to be established based on the sale of broader IT solutions to airlines, hotels and other travel operators. The management team had heavily invested in this area. convinced of the growth opportunities it presented. The emergence of low-cost carriers trying to avoid the GDS (by creating their own online booking engines) was undermining the market, taking business from legacy carriers and selling tickets direct to travellers (bypassing the travel agent). Internet booking sites were taking sales volumes from traditional brick-and-mortar agencies and airline offices, the main outlets for Amadeus information. The threat of disintermediation created uncertainty, especially with respect to price developments. Similarly, online ticket sales by traditional airlines were a cause for concern as they bypassed the GDS and lowered margins (travel agent commissions were eliminated). The impending deregulation of Europe's GDS industry left a question mark about the ability to maintain the existing networks, notably the discrimination between suppliers (eg, airlines) and customers (e.g. travel agencies and booking offices). It also gave the American GDS's a chance to penetrate the European market. The US market had undergone deregulation in the past, providing clues as to what the impact might be. The Suitor: BC Partners A pan-European buyout investor, BC Partners was founded in 1986 as Baring Capital Investors by a group of four Europeans. It had maintained the same strategy and approach since its first fund began investing, focusing on buyouts of larger businesses exhibiting defensive growth characteristics, in Europe and selectively) elsewhere. With its last fund of 4.3 billion raised in 2001, BC Partners was in the process of raising over 5 billion for its next fund. Consequently, reputation and public perceptions of any investments to be made were more important than usual. It was looking to add Amadeus to a high-profile portfolio that included, amongst others, the Italian cheese maker Galbani, French frozen foods retailer Picard, and UK care homes provider General Healthcare Group. The Process BC Partners had been contacted several months earlier by Air France, one of the founders/owners of Amadeus (See Exhibit 1), informing them of the upcoming auction for the three main shareholder stakes in the company. Rumour had it that Apax, Permira, Carlyle, Cinven, PAI, CVC (Citigroup Venture Capital)/Worldspan, CVC Europe, Blackstone and a couple of smaller players were all considering participating in the auction. Given the prospect of a highly contested bidding process, BC Partners needed to stand out from the crowd. With the deal a top priority due to its profile and size, BC Partners had so far focused on building good relationships with the three shareholder airlines. It had also engaged a number of advisors, including former members of Amadeus senior management, who provided insight into the current management's strategic views and business proposition. In their view, the airlines and management were not just seeking a financial sponsor but a partner that would proactively support their strategy for Amadeus, while allowing them to preserve certain governance rights. Once BC Partners' initial research had revealed the strengths of the Amadeus business model, the opportunity to acquire the firm was very attractive despite the challenges that lay in wait for the new owner. The private equity firm now had to weigh its options. In pursuing Amadeus, what strategy should it employ to unlock value? The Strategic Options for Amadeus Based on a first analysis, two approaches seemed feasible and could lead to significant value creation: 1. BC Partners could continue developing Amadeus as the leading travel distribution company, growing sales across different regions by pushing its GDS services. 2. Alternatively, BC Partners could try to modify the underlying business model by repositioning Amadeus as an IT solutions company. Option A: A travel distribution company focused on geographical expansion Under this strategy, the company would focus on the reservations platform offering, and grow by geographically expanding into new markets. Additionally it would focus on the e-commerce platforms for travel agency customers. In 2005, Amadeus had near-monopoly status in Europe, where its market share exceeded 50% in Western Europe overall, and was as high as 80% in certain countries. In North America, however, it had a small presence and a mere 10% market share in the face of stiff competition from Sabre, Worldspan and Galileo Amadeus could increase its market share in North America by leveraging its superior technology and higher service level. But dislodging the incumbents in the largest and most competitive market in the world would be a huge challenge. In Asia, the company's presence was limited, but there was strong potential since air travel was growing rapidly. The International Air Transport Association (IATA) expected the Asia Pacific market to grow by 8% and the Middle East market by 7.5% over the medium term. Amadeus could with limited effort take advantage of these growth markets by increasing its network with airlines here (see Exhibit2). Another focus area in this strategy would be the e-commerce business, a high growth segment. Amadeus had already made acquisitions in this space, and with pan- European online travel agency Opodo, it was set to become one of the top three online travel agencies in Europe. In the first half of 2005, airlines' e-commerce bookings grew by 67%, yet despite this growth, Opodo and similar acquisitions were mostly losing money in 2004. The risk was that online travel agents and airlines could use the internet to bypass Amadeus and apply pressure on its pricing. The team estimated that under this strategy (excluding growth initiatives in the online travel space) the business would continue to grow about 1% below the historical average, and profit margins would grow at about 0.2% p.a. for three years and remain flat in years four and five. This strategy would allow for a reduction of the ongoing investment in the business from the current 151 million in 2004) to 90% the following year, and a stable proportion of revenues thereafter. Exit multiples would likely be similar to the entry. Option B: Develop the IT Solutions division and position Amadeus as a fully-fledged IT supplier to travel providers Although commonly perceived as a travel business with strong expertise in information technology, Amadeus considered itself to be the "leader in information technology, serving the marketing, sales and distribution needs of the global travel and tourism industry." Its IT Solutions division provided sales and registration services, inventory management, route planning management and customer management systems, as well as passenger departure control solutions (check-in processes). The customer management system had been designed with low-cost carriers in mind, and was expected to give Amadeus a competitive edge over stand-alone low-cost carrier systems. The IT Solutions business division Altea Plan was currently used by a small number of airlines including British Airways, TACA, TAROM, and Qantas. Going forward, BC Partners could consider leveraging Amadeus' software and IT capabilities to reposition Amadeus as a full-IT service provider. Promoting the IT Solutions portfolio to airlines would bring new customers and increase revenues from existing ones. This strategy would also create a captive base of airline customers, by reducing the risk of them leaving the system and giving Amadeus almost complete control of their IT systems. In addition, the markets perceived IT companies as attractive thanks to their healthy margins, low exposure to business cycles, non- labour-intensive nature and highly scalable business models. The team estimated that this scenario would require significantly more investment in the early years (+33% more Capex in Y1 and Y2, and a steady proportion of revenues afterwards) but could result in significantly higher growth of +2%, +3%, +4% and +5% over historical average in Y2-Y5. With IT services being a higher margin business, EBITDA as a percentage of sales should grow by 0.6% annually in Y2-Y5. Based on other IT company comparables (see Exhibit 7), it was fair to assume a moderate increase in exit multiple. However, shifting the business model might entail significant risks. How would customers react to a change in business model? Would Lufthansa, Iberia and Air France be supportive of the strategic change in focus? Would it allow competitors to move into the market or strengthen their existing market position? Would management support the strategy and be able to execute it? What if technology problems were to arise from Amadeus and disrupt the business of the major airlines? With Amadeus set to be one of the largest European buyouts ever, the auction reverberated throughout the finance community, with several banks reaching out. Indications for debt were in line with recent large buyout transactions (see Exhibit 8), but the final debt structure would depend on the operating case pursued by the company. Even by simply refinancing and leveraging the deal there could be significant value creation. Exhibit 1 Premiums (bid price vs share price one month before offer) France Germany UK Italy Spain Northern Europe Benelux Total Europe Source: Mergermarket.com 1998-2004 (%) 12.3 9.9 19.5 14.6 7.5 17.0 20022004 - transactions above 100m (%) 21.0 16.3 13.3 15.4 18.2 16.6 77 20.9 16.6 16.1 Exhibit 2 Ownership Structure of Amadeus pre-LBO Ownership Structure of Amadeus Socit Air France Iberia Lineas Areas de Espaa, S.A. Lufthansa Commercial Holding, GmbH Other TOTAL Class "A" Shares 137,847654 107,826,173 29,826,173 314,500,000 590,000,000 % of Class % of Total "A" Shares Votes 23.36% 43.21% 18.28% 33.80% 5.05% 9.34% 53.31% 13.65% 100% 100% Exhibit 3 Amadeus Sales Breakdown by Region (2004) Revenues (In EUR millions) Europe United States Rest of the World Total 2004 1371.9 169.7 514.9 2056.6 66.71% 8.25% 25.03% 100.0% Exhibit 4 Amadeus Consolidated Statements of Income (31 July, 2005) CONSOLIDATED STATEMENTS OF INCOME July 31 2005 December 31 2004 Revenue Cost of Sales Gross Profit 1,406,285 1,104,382 301,903 2,056,680 1,620,379 436,301 SG&A Expenses 59,349 92,887 Operating Income 242,554 343,414 Other Income (Expense) Interest expense, net Exchange gains (losses), net Other income (expenses), net (3,354) 1,901 1,691 (6,045) (4,109) 397 Income Before Income Taxes Income Tax 242,792 90,317 333,657 129,018 Income After Tax 152,475 204,639 Equity income (losses) from associates Minority interests 12,562 7,359 (8,279) 11,672 Net income 172,396 208,032 Basic earnings per class "A" share, in EUR Basic earnings per class "B" share, in EURS Diluted earnings per class "A" share, in EURS Diluted earnings per class "B" share, in EUR 0.30 0.00 0.30 0.00 0.36 0.00 0.36 0.00 Exhibit 5 Amadeus Consolidated Balance Sheet (July 31, 2005) ASSETS July 31 2005 December 31 2004 192,467 300,567 73,341 Current Assets Cash and cash equivalents Accounts receivable, net Accounts receivables - affiliates, net Loans receivable and advances - affiliates Taxes receivable Prepayments and other current assets Total current assets 104,669 245,228 58,921 1,190 41,611 77,456 529,075 57,489 73,957 697,821 Tangible Assets Land and buildings Data processing hardware and software Other tangible assets 129,451 508,518 145,527 783,496 472,080 311,416 130, 142 465,097 138,616 733,855 446,321 287,534 Less accumulated depreciation Net tangible assets Intangible Assets Patents, trademarks and licenses Purchased technology Software development projects Purchased contracts Goodwill Other intangible assets 101,422 83,459 415,923 325, 153 450,413 2,476 1,378,846 513,283 865,563 79,903 72,282 371,859 274,748 453,383 9,137 1,261,312 604, 103 657,209 Less accumulated amortization Net intangible assets Deferred income taxes Loans receivable - affiliates Investments in associates Other long-term investments, net 107,410 1,955 17,726 58,171 185,262 108,779 1,015 27,588 63,839 201,221 Total other non-current assets Total non-current assets 1,362,241 1,145,964 Total Assets 2,060,062 1,675,039 Exhibit 5 (Continued) LIABILITIES AND SHAREHOLDERS EQUITY July 31 2005 December 31 2004 427,877 43,121 Current Liabilities Accounts payable, net Accounts payable - affiliate, net Dividends payable Debt payable within one year Current obligations under finance leases Income taxes payable Other current liabilities Total current liabilities 13,483 24, 196 38,752 134,996 682,468 316,768 27,032 34 8,562 9,996 32,651 127,863 522,906 Long-Term Liabilities Long-term debt Obligations under finance leases Deferred income taxes payable Other long-term liabilities Total long-term liabilities 2,304 101,840 87,464 46,359 237,967 2.538 96,003 74,528 37,303 210,372 Shareholders' Equity Share capital Additional paid-in capital Treasury shares and other similar equity instruments Retained earnings and other reserves Cumulative translation adjustments Subtotal shareholders' equity Minority interests 23,044 380,358 (107,923) 846,905 (20,518) 1,121,866 17,761 23,044 365,219 (109,499) 681,517 (28,557) 931,724 10,037 Total shareholders' equity 1,139,627 941,761 Total Liabilities and Shareholders' Equity 2,060,062 1,675,039 July 31 2005 December 31 2004 60,647 (56,204) (6,674) CONSOLIDATED STATEMENTS OF CASH FLOWS Cash Flows from Financing Activities Proceeds from borrowings Repayments of borrowing Interest paid Redemption of Class "B" shares Acquisition of Treasury shares Disposals of Treasury shares Dividends paid Payment of finance lease liabilities Net cash used in financing activities Effect of Exchange Rate Changes of Cash and Cash Equivalents Net Increase/(Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Period (29) 1.604 32,864 (106,076) (12.533) (485) (63,086) 39,215 (35,000) (10,419) (155,520) (9,651) (10,307) 943 431 87,798 62,568 42, 101 104,669 192,467 Cash and Cash Equivalents at End of Period 104,669 Exhibit 7 Publicly Traded Comparables Travel Agents and Other Similar Comps Trading statistics AV/Sales AVIEBITDA AVEBITA Company name 12/2004E 12/1005E 12/2006E 12/2004E 12/2005E 12/2006E 12/2004E 12/2005E 12/2006 PEG Adj. P/E Ratio 12/2004E 12/2005E 12/2006 12/2004E 12/2005E NM NM NMNM NM NA NA 216 35.2 On-line Travel E Brokers Ctrip LASTMINUTE PRICELINE ORBITZ Mean 09 9.8 11 1010 12.5 10. NA 0908 0.8 19 17 NA 4.3 3.4 4.0 1.1 .0 .0 111 39.2 38.2 10. 197 13.6 18.5 13.6 6859 270 20.9 5.9 4.0 15.4 13.1 8.3 NA 12.7 11.0 8.3 9.5 NM 40.6 18.6 25.7 20.4 26.3 23. 1 28.2 8.3 192 10.5 16.6 14.9 15.9 NA 14.2 15. 9 47.5 222 23.3 27.9 30.2 25.6 177 18.8 20.4 18.3 27.8 75 159 NA 171 15. 9 1.4 .4 0.9 1.0 1.0 Median 1 Diversified Travel Comparables CENDANT 12 TAC / INTERACTIVE 18 Mean 1. 5 Median 1.5 NA NA 11 15 13 1.3 10 NA 1. 0 1.0 70 8. 9 8 . 0 8.0 6.4 7 1 6 .8 6.8 58 NA 5.8 5.8 NA 10.3 10. 3 10. 3 NA 8.1 .1 .1 117 10.5 11.1 11. 10.7 10.9 10.8 10.8 NA 13.9 13. 9 13. 9 0.8 NA .8 .8 0.8 NA 0.8 0.8 8 8 0 0 Internet Software and Services Amazon 22 1 0 Ebay Yahoo Mean Median 9 18 142 12. 1 9.4 12. 1 18. 9 15.8 12.3 15.8 15 11. .9 7.5 .9 24.7 45. 9 40.4 37.0 40.4 19.6 33. 9 292 27.6 29.2 15.5 25.2 226 21.1 22.6 28.3 54.6 60.1 47.7 54.6 23.4 39.3 392 34.0 39.2 20 29. 313 26.8 29.1 34. 9 79. 9 106.9 73.6 79.6 25.4 59. 9 74.4 53.2 59. 9 24.4 46. 59.3 43. 3 4 6.1 22 32 .2 2.2 .8 1.6 23 1.6 1.6 2 9 Exhibit 7 (Con'd) Aggregate Value (EMM) AV/Sales AVIEBITDA 12/2001E 12/1005E 12/2006E 12/2001E 12/2005E 12/2006 AV/EBITA 12/2004E 12/2005E 12/2006 Adj. P/E Ratio 12/2004E 12/2005E 12/2006E 1 IT Services Trading statistics Equity value Company name (EMM) North American Universe Accenture 19,609 EDS 8.656 CSC 7857 ACS 5,947 Amdocs 4.238 CGI 2,206 Bearing Point 1.285 Mean 118 5.5 10.5 5 6 18,147 8,806 9,229 6,171 3,668 2,391 1.55 0.6 0.78 159 2.69 5 176 0.57 0.88 1.83 3.13 117 0.56 19 1.44 0.59 0.72 NA 2.48 0.89 0.49 110 .805 10 4.6 .4 NA 104 5.6 5.1 13.7 11 13.8 123 173 113 15.9 144 12 10.8 8.5 7.6 12. 112 10.6 13.1 9484 9.7 6.5 11.0 9.6 10.6 9.6 213 16.2 20 19.4 18.3 16.5 32.5 20.6 19.4 9.4 12.1 179 16.5 155 14 17. 16.1 16.5 13.4 76 .9 92 9.2 0.95 178 10.1 16.1 NA 144 12.4 10.5 13.6 13.4 113 6.1 6.9 77 6.9 1.464 0.54 9 1.41 124 6.9 13.6 Median 1.17 0.95 0 5.5 13.7 4,122 8.5 3.221 European Universe Atos Origin Capgemini LogicaCMG Tietonator Indra 3.395 3,317 2.053 1,973 1,812 0.79 0.5 0.98 133 2.03 0.75 0.48 0.89 2,334 2,031 1.988 14.1 242 13.7 15. 7 12.9 8.5 0.78 0.48 0.95 125 1.85 106 0.95 13.1 159 137 10.4 14.7 12. 1 11 16.3 74 71 836.5 96 8 2 74 14.3 12.8 9.5 8.4 8.3 7.4 117 114 NM 173 12 18.2 14.7 14. 7 10.2 10.1 10.1 10. 14.6 110 10. 1 16.8 NM 16.7 159 19.8 173 1 6.8 147 135 15.6 Mean 1.13 17 1.00 0.89 12.2 12.9 12.9 20.3 174 14.7 18.4 14.9 13.7 Median 0.98 1 2.1 73 1.2 1.0 1.0 0.9 10.3 9.6 8.3 8.0 Z 1 14.0 3.7 11. 6 11.5 1 0.1 10.1 19.5 18.3 166 16.0 14.1 13.7 Total Mean 1.3 Total Median 1 1. Market data as of December 02, 2004 2. Excluding Goodwill Amortisation and Extraordinary items 1. What characteristics make this an attractive leveraged buyout? 2.What are the specific risks and benefits of each of the two strategies? 3. Which strategy should they propose and why? 4. Auction dynamic: how should they position themselves to win the deal? 5. How can BC Partners differentiate themselves from other bidders? The Buyout of Amadeus Global Travel Distribution In October 2004, BC Partners, a European private equity fund, was contemplating bidding for Amadeus Global Travel Distribution, S.A. - a major information technology player in the global airlines and travel industry. Amadeus had three lines of business: 1. A global distribution system (GDS): a computerized system that enabled airlines and other travel service providers to distribute flights to a large selection of travel agents and ticket offices, and provided information about schedules, seat availability and fares; 2. Airline IT Solutions: complementary services mainly in reservation and sales management (147 airlines outsourced this function to Amadeus in 2004), inventory management and departure control systems, 3. E-commerce: a booking engine provided to online merchant sites to allow them to connect to the GDS. Amadeus also owned minority stakes in a number of online travel agencies. In June 2004, it acquired a majority stake (55%) in Opodo, Europe's largest online travel agency. Listed on the Madrid, Paris and Frankfurt Stock Exchanges, it was one of four major global industry players, and regarded as co-leader thanks to the quality of its technology and its vast database of airlines and travel agencies. The company's share price, however, did not seem to reflect its solid market position or financial standing. Floated at 6 per share by the four founding airlines on the Madrid stock exchange in October 1999, the stock had traded up to a maximum of 16 in the early months of 2000, but had then followed the general downward trend in the European exchanges and the IT sector, stabilizing around the 5 - 5.5 level. The day before the interest of financial investors became public (13th August 2004), shares were trading at 4.92. Once rumours of a possible public-to-private transaction reached the market, they traded up to 6.38. Whatever the final bid for the company, a premium over the current price had likely to be paid (see Exhibit 1 for recent bid premia). In view of this valuation, BC Partners saw an interesting investment opportunity, particularly given Amadeus' attractive growth track record, strong management team, close-to-zero debt and consistent cash-flow generation - operating cash flow was expected to reach more than 400 million in 2004. In many respects Amadeus appeared to be an ideal candidate for a leveraged buyout (LBO). The Target: Amadeus The global travel distribution company was founded by Air France, Iberia, SAS and Lufthansa in 1987. From the outset, it had delivered a robust financial performance, benefitting from the sustained growth in air travel worldwide - a trend that analysts expected to continue. Averaging a growth rate of 6.7% over the last four years (2000- 04), EBITDA margins had improved by 2.7% during the period. Over the preceding years, a series of crises had hit the global travel industry, including the wars in Iraq and Afghanistan, the 9/11 terrorist attacks, and the avian flu epidemic in 2003, sending air traffic volumes into a tailspin, but the company managed to sustain its impressive growth. Its leading market position was also protected by high barriers to entry (mainly the difficulty of replicating the technology and the network effect). In 2004, Amadeus held a leading competitive position in the global GDS market with a 29% share. Its market share ranged from over 50% in Western Europe (94% in Spain, 80% in France and Scandinavia, and 75% in Germany) to slightly less than 10% in North America, where its three major competitors were based. Its leadership in the GDS and airline IT solutions space was attributed to: Continuous investment in technology since 1988, which put it well ahead of the competition in terms of technical architecture and the efficiency of its IT systems. Among its rivals, Amadeus had the clearest path to integrating more robust and flexible open-source operating systems (as opposed to closed-source "legacy" IT systems). Outsourcing contracts signed with major airlines for Airline IT Solutions, such as the highly acclaimed migration of Qantas inventory management, a critical airline system, in October 2004. Notwithstanding, its Airline IT Solutions business was still in its infancy. In 2004, the majority of clients had only recently been acquired and it was still in the pilot phase. A major advantage of the Amadeus business model was its scalability. The company's cost and capital base were relatively fixed, which meant that additional booking volume meant wider margins and faster cash generation. Founder and CEO, Jose Antonio Tazon, and the members of the Executive Committee, were regarded as pioneers in the industry. Most had been with Amadeus from the start (average tenure was 15 years). Pre-Acquisition Challenges Several challenges were identified by the BC Partners deal team: . Given the complexity of the business, it was vital to have a top management succession plan and ensure that successful managers stayed with the company. Keeping the four airline owners 'onside' was equally important, as they were likely to remain minority investors with rights that protected them strategically, such as to veto the company falling into the hands of a competitor. The business model had to adapt to new trends: a new revenue stream had to be established based on the sale of broader IT solutions to airlines, hotels and other travel operators. The management team had heavily invested in this area. convinced of the growth opportunities it presented. The emergence of low-cost carriers trying to avoid the GDS (by creating their own online booking engines) was undermining the market, taking business from legacy carriers and selling tickets direct to travellers (bypassing the travel agent). Internet booking sites were taking sales volumes from traditional brick-and-mortar agencies and airline offices, the main outlets for Amadeus information. The threat of disintermediation created uncertainty, especially with respect to price developments. Similarly, online ticket sales by traditional airlines were a cause for concern as they bypassed the GDS and lowered margins (travel agent commissions were eliminated). The impending deregulation of Europe's GDS industry left a question mark about the ability to maintain the existing networks, notably the discrimination between suppliers (eg, airlines) and customers (e.g. travel agencies and booking offices). It also gave the American GDS's a chance to penetrate the European market. The US market had undergone deregulation in the past, providing clues as to what the impact might be. The Suitor: BC Partners A pan-European buyout investor, BC Partners was founded in 1986 as Baring Capital Investors by a group of four Europeans. It had maintained the same strategy and approach since its first fund began investing, focusing on buyouts of larger businesses exhibiting defensive growth characteristics, in Europe and selectively) elsewhere. With its last fund of 4.3 billion raised in 2001, BC Partners was in the process of raising over 5 billion for its next fund. Consequently, reputation and public perceptions of any investments to be made were more important than usual. It was looking to add Amadeus to a high-profile portfolio that included, amongst others, the Italian cheese maker Galbani, French frozen foods retailer Picard, and UK care homes provider General Healthcare Group. The Process BC Partners had been contacted several months earlier by Air France, one of the founders/owners of Amadeus (See Exhibit 1), informing them of the upcoming auction for the three main shareholder stakes in the company. Rumour had it that Apax, Permira, Carlyle, Cinven, PAI, CVC (Citigroup Venture Capital)/Worldspan, CVC Europe, Blackstone and a couple of smaller players were all considering participating in the auction. Given the prospect of a highly contested bidding process, BC Partners needed to stand out from the crowd. With the deal a top priority due to its profile and size, BC Partners had so far focused on building good relationships with the three shareholder airlines. It had also engaged a number of advisors, including former members of Amadeus senior management, who provided insight into the current management's strategic views and business proposition. In their view, the airlines and management were not just seeking a financial sponsor but a partner that would proactively support their strategy for Amadeus, while allowing them to preserve certain governance rights. Once BC Partners' initial research had revealed the strengths of the Amadeus business model, the opportunity to acquire the firm was very attractive despite the challenges that lay in wait for the new owner. The private equity firm now had to weigh its options. In pursuing Amadeus, what strategy should it employ to unlock value? The Strategic Options for Amadeus Based on a first analysis, two approaches seemed feasible and could lead to significant value creation: 1. BC Partners could continue developing Amadeus as the leading travel distribution company, growing sales across different regions by pushing its GDS services. 2. Alternatively, BC Partners could try to modify the underlying business model by repositioning Amadeus as an IT solutions company. Option A: A travel distribution company focused on geographical expansion Under this strategy, the company would focus on the reservations platform offering, and grow by geographically expanding into new markets. Additionally it would focus on the e-commerce platforms for travel agency customers. In 2005, Amadeus had near-monopoly status in Europe, where its market share exceeded 50% in Western Europe overall, and was as high as 80% in certain countries. In North America, however, it had a small presence and a mere 10% market share in the face of stiff competition from Sabre, Worldspan and Galileo Amadeus could increase its market share in North America by leveraging its superior technology and higher service level. But dislodging the incumbents in the largest and most competitive market in the world would be a huge challenge. In Asia, the company's presence was limited, but there was strong potential since air travel was growing rapidly. The International Air Transport Association (IATA) expected the Asia Pacific market to grow by 8% and the Middle East market by 7.5% over the medium term. Amadeus could with limited effort take advantage of these growth markets by increasing its network with airlines here (see Exhibit2). Another focus area in this strategy would be the e-commerce business, a high growth segment. Amadeus had already made acquisitions in this space, and with pan- European online travel agency Opodo, it was set to become one of the top three online travel agencies in Europe. In the first half of 2005, airlines' e-commerce bookings grew by 67%, yet despite this growth, Opodo and similar acquisitions were mostly losing money in 2004. The risk was that online travel agents and airlines could use the internet to bypass Amadeus and apply pressure on its pricing. The team estimated that under this strategy (excluding growth initiatives in the online travel space) the business would continue to grow about 1% below the historical average, and profit margins would grow at about 0.2% p.a. for three years and remain flat in years four and five. This strategy would allow for a reduction of the ongoing investment in the business from the current 151 million in 2004) to 90% the following year, and a stable proportion of revenues thereafter. Exit multiples would likely be similar to the entry. Option B: Develop the IT Solutions division and position Amadeus as a fully-fledged IT supplier to travel providers Although commonly perceived as a travel business with strong expertise in information technology, Amadeus considered itself to be the "leader in information technology, serving the marketing, sales and distribution needs of the global travel and tourism industry." Its IT Solutions division provided sales and registration services, inventory management, route planning management and customer management systems, as well as passenger departure control solutions (check-in processes). The customer management system had been designed with low-cost carriers in mind, and was expected to give Amadeus a competitive edge over stand-alone low-cost carrier systems. The IT Solutions business division Altea Plan was currently used by a small number of airlines including British Airways, TACA, TAROM, and Qantas. Going forward, BC Partners could consider leveraging Amadeus' software and IT capabilities to reposition Amadeus as a full-IT service provider. Promoting the IT Solutions portfolio to airlines would bring new customers and increase revenues from existing ones. This strategy would also create a captive base of airline customers, by reducing the risk of them leaving the system and giving Amadeus almost complete control of their IT systems. In addition, the markets perceived IT companies as attractive thanks to their healthy margins, low exposure to business cycles, non- labour-intensive nature and highly scalable business models. The team estimated that this scenario would require significantly more investment in the early years (+33% more Capex in Y1 and Y2, and a steady proportion of revenues afterwards) but could result in significantly higher growth of +2%, +3%, +4% and +5% over historical average in Y2-Y5. With IT services being a higher margin business, EBITDA as a percentage of sales should grow by 0.6% annually in Y2-Y5. Based on other IT company comparables (see Exhibit 7), it was fair to assume a moderate increase in exit multiple. However, shifting the business model might entail significant risks. How would customers react to a change in business model? Would Lufthansa, Iberia and Air France be supportive of the strategic change in focus? Would it allow competitors to move into the market or strengthen their existing market position? Would management support the strategy and be able to execute it? What if technology problems were to arise from Amadeus and disrupt the business of the major airlines? With Amadeus set to be one of the largest European buyouts ever, the auction reverberated throughout the finance community, with several banks reaching out. Indications for debt were in line with recent large buyout transactions (see Exhibit 8), but the final debt structure would depend on the operating case pursued by the company. Even by simply refinancing and leveraging the deal there could be significant value creation. Exhibit 1 Premiums (bid price vs share price one month before offer) France Germany UK Italy Spain Northern Europe Benelux Total Europe Source: Mergermarket.com 1998-2004 (%) 12.3 9.9 19.5 14.6 7.5 17.0 20022004 - transactions above 100m (%) 21.0 16.3 13.3 15.4 18.2 16.6 77 20.9 16.6 16.1 Exhibit 2 Ownership Structure of Amadeus pre-LBO Ownership Structure of Amadeus Socit Air France Iberia Lineas Areas de Espaa, S.A. Lufthansa Commercial Holding, GmbH Other TOTAL Class "A" Shares 137,847654 107,826,173 29,826,173 314,500,000 590,000,000 % of Class % of Total "A" Shares Votes 23.36% 43.21% 18.28% 33.80% 5.05% 9.34% 53.31% 13.65% 100% 100% Exhibit 3 Amadeus Sales Breakdown by Region (2004) Revenues (In EUR millions) Europe United States Rest of the World Total 2004 1371.9 169.7 514.9 2056.6 66.71% 8.25% 25.03% 100.0% Exhibit 4 Amadeus Consolidated Statements of Income (31 July, 2005) CONSOLIDATED STATEMENTS OF INCOME July 31 2005 December 31 2004 Revenue Cost of Sales Gross Profit 1,406,285 1,104,382 301,903 2,056,680 1,620,379 436,301 SG&A Expenses 59,349 92,887 Operating Income 242,554 343,414 Other Income (Expense) Interest expense, net Exchange gains (losses), net Other income (expenses), net (3,354) 1,901 1,691 (6,045) (4,109) 397 Income Before Income Taxes Income Tax 242,792 90,317 333,657 129,018 Income After Tax 152,475 204,639 Equity income (losses) from associates Minority interests 12,562 7,359 (8,279) 11,672 Net income 172,396 208,032 Basic earnings per class "A" share, in EUR Basic earnings per class "B" share, in EURS Diluted earnings per class "A" share, in EURS Diluted earnings per class "B" share, in EUR 0.30 0.00 0.30 0.00 0.36 0.00 0.36 0.00 Exhibit 5 Amadeus Consolidated Balance Sheet (July 31, 2005) ASSETS July 31 2005 December 31 2004 192,467 300,567 73,341 Current Assets Cash and cash equivalents Accounts receivable, net Accounts receivables - affiliates, net Loans receivable and advances - affiliates Taxes receivable Prepayments and other current assets Total current assets 104,669 245,228 58,921 1,190 41,611 77,456 529,075 57,489 73,957 697,821 Tangible Assets Land and buildings Data processing hardware and software Other tangible assets 129,451 508,518 145,527 783,496 472,080 311,416 130, 142 465,097 138,616 733,855 446,321 287,534 Less accumulated depreciation Net tangible assets Intangible Assets Patents, trademarks and licenses Purchased technology Software development projects Purchased contracts Goodwill Other intangible assets 101,422 83,459 415,923 325, 153 450,413 2,476 1,378,846 513,283 865,563 79,903 72,282 371,859 274,748 453,383 9,137 1,261,312 604, 103 657,209 Less accumulated amortization Net intangible assets Deferred income taxes Loans receivable - affiliates Investments in associates Other long-term investments, net 107,410 1,955 17,726 58,171 185,262 108,779 1,015 27,588 63,839 201,221 Total other non-current assets Total non-current assets 1,362,241 1,145,964 Total Assets 2,060,062 1,675,039 Exhibit 5 (Continued) LIABILITIES AND SHAREHOLDERS EQUITY July 31 2005 December 31 2004 427,877 43,121 Current Liabilities Accounts payable, net Accounts payable - affiliate, net Dividends payable Debt payable within one year Current obligations under finance leases Income taxes payable Other current liabilities Total current liabilities 13,483 24, 196 38,752 134,996 682,468 316,768 27,032 34 8,562 9,996 32,651 127,863 522,906 Long-Term Liabilities Long-term debt Obligations under finance leases Deferred income taxes payable Other long-term liabilities Total long-term liabilities 2,304 101,840 87,464 46,359 237,967 2.538 96,003 74,528 37,303 210,372 Shareholders' Equity Share capital Additional paid-in capital Treasury shares and other similar equity instruments Retained earnings and other reserves Cumulative translation adjustments Subtotal shareholders' equity Minority interests 23,044 380,358 (107,923) 846,905 (20,518) 1,121,866 17,761 23,044 365,219 (109,499) 681,517 (28,557) 931,724 10,037 Total shareholders' equity 1,139,627 941,761 Total Liabilities and Shareholders' Equity 2,060,062 1,675,039 July 31 2005 December 31 2004 60,647 (56,204) (6,674) CONSOLIDATED STATEMENTS OF CASH FLOWS Cash Flows from Financing Activities Proceeds from borrowings Repayments of borrowing Interest paid Redemption of Class "B" shares Acquisition of Treasury shares Disposals of Treasury shares Dividends paid Payment of finance lease liabilities Net cash used in financing activities Effect of Exchange Rate Changes of Cash and Cash Equivalents Net Increase/(Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of Period (29) 1.604 32,864 (106,076) (12.533) (485) (63,086) 39,215 (35,000) (10,419) (155,520) (9,651) (10,307) 943 431 87,798 62,568 42, 101 104,669 192,467 Cash and Cash Equivalents at End of Period 104,669 Exhibit 7 Publicly Traded Comparables Travel Agents and Other Similar Comps Trading statistics AV/Sales AVIEBITDA AVEBITA Company name 12/2004E 12/1005E 12/2006E 12/2004E 12/2005E 12/2006E 12/2004E 12/2005E 12/2006 PEG Adj. P/E Ratio 12/2004E 12/2005E 12/2006 12/2004E 12/2005E NM NM NMNM NM NA NA 216 35.2 On-line Travel E Brokers Ctrip LASTMINUTE PRICELINE ORBITZ Mean 09 9.8 11 1010 12.5 10. NA 0908 0.8 19 17 NA 4.3 3.4 4.0 1.1 .0 .0 111 39.2 38.2 10. 197 13.6 18.5 13.6 6859 270 20.9 5.9 4.0 15.4 13.1 8.3 NA 12.7 11.0 8.3 9.5 NM 40.6 18.6 25.7 20.4 26.3 23. 1 28.2 8.3 192 10.5 16.6 14.9 15.9 NA 14.2 15. 9 47.5 222 23.3 27.9 30.2 25.6 177 18.8 20.4 18.3 27.8 75 159 NA 171 15. 9 1.4 .4 0.9 1.0 1.0 Median 1 Diversified Travel Comparables CENDANT 12 TAC / INTERACTIVE 18 Mean 1. 5 Median 1.5 NA NA 11 15 13 1.3 10 NA 1. 0 1.0 70 8. 9 8 . 0 8.0 6.4 7 1 6 .8 6.8 58 NA 5.8 5.8 NA 10.3 10. 3 10. 3 NA 8.1 .1 .1 117 10.5 11.1 11. 10.7 10.9 10.8 10.8 NA 13.9 13. 9 13. 9 0.8 NA .8 .8 0.8 NA 0.8 0.8 8 8 0 0 Internet Software and Services Amazon 22 1 0 Ebay Yahoo Mean Median 9 18 142 12. 1 9.4 12. 1 18. 9 15.8 12.3 15.8 15 11. .9 7.5 .9 24.7 45. 9 40.4 37.0 40.4 19.6 33. 9 292 27.6 29.2 15.5 25.2 226 21.1 22.6 28.3 54.6 60.1 47.7 54.6 23.4 39.3 392 34.0 39.2 20 29. 313 26.8 29.1 34. 9 79. 9 106.9 73.6 79.6 25.4 59. 9 74.4 53.2 59. 9 24.4 46. 59.3 43. 3 4 6.1 22 32 .2 2.2 .8 1.6 23 1.6 1.6 2 9 Exhibit 7 (Con'd) Aggregate Value (EMM) AV/Sales AVIEBITDA 12/2001E 12/1005E 12/2006E 12/2001E 12/2005E 12/2006 AV/EBITA 12/2004E 12/2005E 12/2006 Adj. P/E Ratio 12/2004E 12/2005E 12/2006E 1 IT Services Trading statistics Equity value Company name (EMM) North American Universe Accenture 19,609 EDS 8.656 CSC 7857 ACS 5,947 Amdocs 4.238 CGI 2,206 Bearing Point 1.285 Mean 118 5.5 10.5 5 6 18,147 8,806 9,229 6,171 3,668 2,391 1.55 0.6 0.78 159 2.69 5 176 0.57 0.88 1.83 3.13 117 0.56 19 1.44 0.59 0.72 NA 2.48 0.89 0.49 110 .805 10 4.6 .4 NA 104 5.6 5.1 13.7 11 13.8 123 173 113 15.9 144 12 10.8 8.5 7.6 12. 112 10.6 13.1 9484 9.7 6.5 11.0 9.6 10.6 9.6 213 16.2 20 19.4 18.3 16.5 32.5 20.6 19.4 9.4 12.1 179 16.5 155 14 17. 16.1 16.5 13.4 76 .9 92 9.2 0.95 178 10.1 16.1 NA 144 12.4 10.5 13.6 13.4 113 6.1 6.9 77 6.9 1.464 0.54 9 1.41 124 6.9 13.6 Median 1.17 0.95 0 5.5 13.7 4,122 8.5 3.221 European Universe Atos Origin Capgemini LogicaCMG Tietonator Indra 3.395 3,317 2.053 1,973 1,812 0.79 0.5 0.98 133 2.03 0.75 0.48 0.89 2,334 2,031 1.988 14.1 242 13.7 15. 7 12.9 8.5 0.78 0.48 0.95 125 1.85 106 0.95 13.1 159 137 10.4 14.7 12. 1 11 16.3 74 71 836.5 96 8 2 74 14.3 12.8 9.5 8.4 8.3 7.4 117 114 NM 173 12 18.2 14.7 14. 7 10.2 10.1 10.1 10. 14.6 110 10. 1 16.8 NM 16.7 159 19.8 173 1 6.8 147 135 15.6 Mean 1.13 17 1.00 0.89 12.2 12.9 12.9 20.3 174 14.7 18.4 14.9 13.7 Median 0.98 1 2.1 73 1.2 1.0 1.0 0.9 10.3 9.6 8.3 8.0 Z 1 14.0 3.7 11. 6 11.5 1 0.1 10.1 19.5 18.3 166 16.0 14.1 13.7 Total Mean 1.3 Total Median 1 1. Market data as of December 02, 2004 2. Excluding Goodwill Amortisation and Extraordinary items