ALI MOORE: The relationship between Flight Centre and its private equity suitors might have soured, but analysts say the joint venture bid is not dead yet. Last week, Flight Centre rejected Pacific Equity Partners' approach after an independent report found the offer was neither fair nor reasonable. But experts say the travel agency has strong growth prospects and they wouldn't be surprised to see PEP make another tilt. Neal Woolrich reports.
NEAL WOOLRICH: Pacific Equity Partners might be wondering what they have to do to win control of Flight Centre. Early this year a takeover attempt failed when institutional investors demanded a higher price. In May, Flight Centre's founders and majority owners devised a new joint venture with PEP. But the shareholder support disappeared last week when an independent report said PEP's new offer was neither fair nor reasonable.
STEVE JOHNSON, MD INTELLIGENT INVESTOR: I think they're understandably frustrated because as I said, the business was $10 18 months ago when they probably first started thinking about this. But unfortunately the business has changed and it's improved and shareholders don't have to sell. So there's a lot of people out there now thinking they're quite happy holding this business and tough luck to private equity.
NEAL WOOLRICH: PEP is arguing that the valuation of Flight Centre is incomplete and inaccurate. But Steve Johnson says a rapid improvement in Flight Centre's business in the past six months has made the latest proposal much less attractive.
STEVE JOHNSON: I wouldn't be surprise if they come back with another bid especially after what they've been saying over recent days. I mean, they've seen the improvement in the business as well, so it's probably worth more to them, but there has to come a point where they get sick of it and I'd say some of the changes in the debt markets over recent weeks would make it more difficult from their end as well.
NEAL WOOLRICH: Flight Centre is forecasting earnings growth of up to 30 per cent when it releases its profit report at the end of the month. Analysts say that will make the travel agency even more attractive as a potential takeover or joint venture target.
TIM LLINCOLN, MD LINCOLN SHAREMARKET SOLUTIONS: They're currently trading on a multiple of around 23 times relative to the consumer services industry group for which they operate in. So, you know, not expensive in any sense of the word and based on their forecast earnings to June 30 of 30 per cent, we'll see that value come down even further to around 17 times earnings, which would suggest that they would be trading at a discount to their industry.
NEAL WOOLRICH: Tim Lincoln says it's been a remarkable turnaround. Flight Centre's share price nearly halved in 2005 after Qantas slashed its travel agent commissions.
TIM WILSON: They went through a period there right up until 2006 where their earnings were retracting quite aggressively. However, now, they've been able to change their business model around from very much a retail model which became a very competitive environment, into more of a corporate-focused business. And that seems to have paid dividends for them.
NEAL WOOLRICH: And while PEP has now been knocked back twice, analysts say Flight Centre's managing director, Graham Turner, is hoping to leave the business, and that means there could still be key support from inside the company to strike a new private equity deal.
Lincoln - Intelligent Sharemarket Solutions