As coronavirus crushes travel industry, Expedia maps out private equity survival strategy

As online travel giant Expedia struggles to survive the ravages of the coronavirus crisis, private equity has jumped in to help the company stay afloat and potentially ready it for sale when the economy restarts. 

Apollo Global Management and Silver Lake Partners’ $1.2 billion in cash infusion announced on Thursday could help the online travel operator tackle the fallout from the COVID-19 pandemic as well as longer-term obstacles like Google’s threat to its business and whether a sale could be in the cards.

“Management appears to be cleaning up the business to hand off at some point,” wrote Scott Devitt, internet analyst at Stifel to investors.

David Sambur, co-lead partner of Apollo’s private equity business, and Greg Mondre, Co-CEO and managing partner of Silver Lake Partners will join Expedia’s board.

“Expedia is the exact type of business we look to invest in: it’s an innovator and market leader and has changed how the world purchases travel and experiences,” Sambur said.

Both private equity firms appear to be betting on the beleaguered travel and hospitality sector as it faces a bleak short-term outlook. 

Apollo and Silver Lake participated in Airbnb’s latest $1 billion debt offering.

Apollo was part of United Airlines most recent round of debt financing. Sources say Apollo Group has invested over $10 billion in equity and debt since the coronavirus outbreak began. 

Beyond the pain inflicted by Covid-19 on the travel sector, Google’s travel platform has challenged the online travel industry, making it harder for Expedia among others to generate as much organic traffic to their website.

With no clarity as to when travel restrictions will be lifted, hotels, cruise lines and online travel agencies have had to pursue a range of options to stay afloat.

Carnival raised over $6 billion in equity and debt. The company, despite its issues, was also able to get a large foreign investor on board – the Saudi sovereign wealth fund. In the latest filing, the Saudi fund disclosed an 8.2% stake.

Sources say Goldman Sachs is helping Norwegian Cruise Line seeking financing options, including pitching to private equity. 

It is unclear whether Norwegian will be successful. Among the publicly listed cruise operators, it has the highest debt to equity ratio, according to Suntrust.

Both Apollo Group and TPG Capital invested billions into Norwegian Cruise Line back in 2008 and took the cruise operator public in 2013.

Perhaps the most instrumental role private equity played at that time was pushing Norwegian to acquire Prestige Cruises for $3 billion in 2014. The acquisition not only expanded the cruise operator’s portfolio but gave it a footprint in the premium travel segment.

One year after the deal was announced, Norwegian Cruise Line shares nearly doubled. Both private equity companies have since exited their positions in Norwegian and returned capital to investors.

Using Norwegian as a case study, experts are speculating as to whether Apollo Group and Silver Lake will push for Expedia to incorporate more M&A into its growth strategy. Over the past ten years, Expedia has used inorganic growth to expand its portfolio of brands and enter the short-term rental space.

Key acquisitions Expedia has made in the past include Orbitz for $1.6 billion, HomeAway (later renamed VRBO) for $3.9 billion and Travelocity for $280 million.

“We believe the addition of private equity to Expedia’s board is likely to sharpen focus on ongoing restructuring efforts at the company…it also increases the odds of sale of non-core assets or even a potential take-out of the entire company, said Naved Khan, online travel analyst at Suntrust Robinson to investors. 

Devitt says Expedia’s current management structure and new CEO Peter Kern, whose experience is largely outside of travel, suggests the company may be put up for sale at a better time.

Mark Mahaney, internet analyst at RBC Capital Markets, expects a larger focus on cutting costs. “PE (private equity) may bring more cost discipline to Expedia, though I imagine that Diller would have done that on his own anyway,” Mahaney told CNBC in an email.

Expedia, in addition to announcing new capital, said furloughs and reduced work hours would extend until August of this year.