Blackstone to Spin-Off Orbitz

May 11, 2007
The IPO offering materials offer scant evidence that Blackstone was able to solve Orbitz's problems. Indeed, there are signs that the IPO is being staged in a hurry.

Orbitz, the online airline and hotel booking service based in Chicago, is writing a chilling travelogue of its own as it wanders through the investment world.

In the latest chapter, private-equity investor Blackstone Group apparently has decided to cut its losses by offering shares of what is now called Orbitz Worldwide to the public.

The image of private-equity investors as patient, long-term nurturers of corporate growth is tarnished by this proposed transaction. It was only last August that Blackstone acquired Orbitz from the financially troubled conglomerate Cendant.

Preliminary offering materials, filed Thursday, indicate that operating losses at Orbitz persist, even as the popularity of online travel booking increases. Blackstone plans to use the proceeds from the proposed IPO to pay down debt, not invest in Orbitz's future.

"Orbitz has grown tremendously in the gross bookings it has been able to produce, but as a profitable business it's very disappointing," said Michael Sklar, a partner with the law firm DLA Piper and president of the Chicago chapter of the Association for Corporate Growth. (Sklar reviewed the Orbitz prospectus at my request.)

"It's a matter of incredible competition from other Internet booking services, plus the squeeze that the hotels and airlines are putting on commissions."

The IPO offering materials offer scant evidence that Blackstone was able to solve Orbitz's problems. Indeed, there are signs that the IPO is being staged in a hurry, as Blackstone itself faces scrutiny in its own quest to sell shares in an IPO.

A "new global technology platform" designed to improve cost saving and inefficiency at Orbitz remains uncompleted, according to the IPO prospectus.

The prospectus discloses that the IPO is being prepared without the company having fixed "a material weakness in our internal controls over financial reporting that, if not corrected, could result in material misstatements in our financial statements."

Orbitz was created by five major airlines in 1999 and went public for the first time in 2003. Critics pointed to the company's possible conflicts of interest with the airlines, which continued to control Orbitz after the first IPO. The airlines had little incentive to increase the commissions they paid Orbitz for booking tickets.

In 2004 Orbitz was acquired by Cendant, whose failed efforts to combine various services businesses led to it being dubbed Des-Cendant, as its share price sank. Blackstone acquired Cendant's travel business last year for $4.3 billion and will retain control of Orbitz after the proposed second IPO.

Net revenue rose 10 percent, to $752 billion, in 2006, a period that included four months of Blackstone ownership, compared with 2005. The net loss declined to $146 million last year from $388 million. As a public company Orbitz would remain encumbered, not by its founding airlines but by Blackstone's debt obligations.

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