If FLT was an average business earning a pedestrian return on its capital, and I had acquired it at substantially below book value (in fact, most likely, at less than NTA), then I would be be excited by the prospect of a take-over offer, even if it was just at a modest premium to book value. For if this was the case, my acquisition of FLT would never have constituted a long-term investment based on any optimism about the business' future. It would have been a deep-value play, based on the expectation of a short to medium-term re-rating of the stock, back to something resembling fair value.
However, FLT is not such a beast. In fact, far from it.
FLT is a business which has demonstrated an ability to generate superior returns on it's capital, through a number of business cycles, and despite the onslaught of technological disruption in it's industry. It has achieved this with no net debt. Quite the contrary, it has always held large amounts of cash. In the last several years it has held net-cash to the tune of over 30% of its equity (that's cash that is in excess of that held on behalf of clients). It currently stands at close to 50% of equity. What's more, it has achieved these returns whilst carrying the cost of a vast bricks-and-mortar network.
FLT has a stranglehold on the outbound leisure travel market in Australia, as well as a large market share in corporate travel for SMSB's. This is despite the onslaught of OTA's and direct bookings (online travel agents).
It's superior economics, I strongly believe, stem from a unique, high-performance culture, that emanates from its strong, independent minded leadership. This is a leadership that is strongly incentivized to keep strengthening its competitive advantage, and to not diminish the "moat" for the sake of expediency. These sentiments are backed up by its track record.
These sorts of businesses do not grow on trees. They are the sort of business, I believe, for which time can work wonders. As such, it can be very difficult to put an upper limit on their fair value. To use a well known cliche, time is the best friend of a wonderful business, though it is the enemy of the mediocre one. For me, FLT is indeed a wonderful business.
So if FLT was to be bought-out at $50 per share, I would be left with a massive capital gains tax, and the daunting notion of having to find a home that's as attractive as FLT. Not an easy task. So, you can see, perhaps, why this prospect is a little less than than exciting for me.
There are a few other things to consider.
What would the motivation be for Priceline (to name one of the global gorillas in OTA's) to acquire FLT? Unless Priceline decided to change its strategy to become more than just an OTA. I would suggest that its pure OTA model was source of it's scale, and is where its competitive strength resides. Why would they want to acquire a business who's key value proposition, and a key component of its price tag, is tied to it's network of bricks-and-mortar shops and flesh-and-blood people? On the other hand, if Priceline really believe that OTA's are the way of the future, then why would they want to pay a premium for a business with no future? Wouldn't it make more sense to just take market share, gradually, via organic growth?
If you believe the tide is turning, and Priceline sees value, going forward, in FLT's business model, then this would simply be a further endorsement of FLT, and all the more reason for shareholders to stay on the bus. But if Priceline did buy FLT, and they attempted to integrate it into their global operations, then they would be paying a high multiple for a business who's multiple can only be justified (going forward), I would suggest, by its culture. A culture that in all likelihood, would be eroded by its integration into Priceline.
Further, my understanding is that Priceline's returns on its capital have been suffering in recent years, due to its aggressive, acquisition-led expansion outside of the US. It is now suffering, relative to Expedia, for example, because Expedia has been more cautious in this regard. So I'm not sure what appetite Priceline will have, in the medium term, for another expensive acquisition.
Finally, the reality is that FLT is tightly held by shareholders who understand its value proposition, and who believe in the business. The MD alone owns 15% of the shares, and there is a range of "value minded" institutional investors holding probably 20%. So I'm not sure how easily the business would be acquired from its existing, and I might say enthusiastic, shareholder base.
Cheers, Mars
FLT Price at posting:
$36.37 Sentiment: Buy Disclosure: Held
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