National bank financial target at $1.50Stock rating : outperform
GuestLogix closes acquisition of Dublin-based OpenJaw
(OJ). OJ is an e-commerce vendor with a powerful dynamic
provisioning platform used by travel-related vendors (airlines,
hotels, loyalty, travel agents) to serve ancillary promotions to
passengers. The acquisition is transformational in that GXI
becomes the first vendor to offer travel vendors the ability to
serve ancillaries to passengers across the entire journey with
OJ’s off-board platform and GXI’s on-board solutions.
Transaction details. GuestLogix paid $41.2 mln to acquire
~$19.5 mln of revenue (at current FX rate): 2.1x EV/Sales. OJ
has delivered ~23% revenue growth over the past two years
and operates at a cash EBITDA margin of ~10%. The
valuation equates to ~21x EV/EBITDA. At first blush the
purchase price seems expensive. After expected synergies of
at least $2 mln the valuation is closer to 10x EV/EBITDA. One
synergy is directors’ remuneration of over EUR600k in each of
the past two years. We reviewed the expense synergy plan
and are comfortable with the likelihood of execution.
Revenue synergies. There are significant cross-selling
opportunities with this combined ancillary market leader. This
is one area where we expect significant upside after a 12-18
month sales push is executed. Not reflected in our estimates.
The stock reaction to the deal. GXI raised C$58.3 mln to
execute a $41.2 mln (US$ to be clear) transaction (C$20 mln
converts, the rest equity of which OJ shareholders received
C$9.3 mln as the equity component of the deal). Investors
seem concerned that more cash than necessary was raised;
we address in this note (debt repayment and closing costs).
Risk has increased; reward could be substantial. Target &
rating unchanged from prior to restriction. The current
valuation of ~9x EV/FCF and ~5x EV/EBITDA on our F2016E
estimates (reflecting no rev synergies) seems punitive. We
address why the risk/return is worth a hard look.