Helloworld’s takeover of the Magellan Travel Group came as a shock to the industry when it was announced in late December 2017 – not least the members of the previously happy, satisfied and prosperous group who were blindsided by the announcement of the whopping $32.5 million deal. Bruce Piper looks behind the scenes of the acquisition which could be set to once again change the Australian travel distribution landscape.
Disbelief, devastation, mystery, suddenness, lack of transparency, naked greed. The adjectives began flying quickly after 19 December 2017, when Helloworld Travel Limited released an ASX announcement confirming it was set to acquire the Magellan Travel Group. Later that week — after 7pm on the Friday before Christmas — a further update confirmed the transaction documentation had been finalised, with the deal expected to settle in early January.
It’s likely to be “back to the future” for many Magellan members, with the acquisition set to see them return to the business they progressively fled over the last ten years, seeking relief from multiple ownership and leadership changes, as well as perceptions that shareholders in Helloworld/Jetset Travelworld/Stella were benefiting at the agents’ expense.
It seemed the deal was done and dusted with unseemly haste. Magellan chairman Andrew Jones at the time claimed feedback from members had “on the whole been very positive”. Despite his repeated insistence that any dissenters were a small minority, members quickly mobilised to firmly express their opposition to the deal — and those numbers appeared to just grow and grow. Key issues cited were a perception of unfairness, with members initially offered a reported $10,000 in cash plus $25,000 in Helloworld shares — while the lion’s share of the proceeds were to go to the holders of the ‘founding’ shareholdings, Andrew and Trevor Jones along with ceo Andrew Macfarlane. Directors Penny Spencer and Carl Buerckner were also rumoured to be receiving a generous payday – but in contrast to Magellan’s transaparency mantra details remain sketchy.
There were also questions around the timing of the deal, with a perception that it was being “snuck through” over the holiday period. There was disbelief at claims that it had all come together in a six week period, along with fury at a lack of information which was claimed by the directors to be due to rules around disclosure by the publicly-listed Helloworld Travel. But worst of all was the fact that the deal had been done without any consultation whatsoever. As one prominent member put it to travelBulletin, “it is fair to say that in a heartbeat the happiest, and arguably the best group in the industry has become a sad, angry one”.
Following legal advice and extensive poring over the Magellan Trust Deed which governs the group — and in theory guaranteed Magellan could never be sold without the members’ consent — a letter signed by agents representing about a third of Magellan’s 130-strong office network was sent to the directors, saying they were “obliged pursuant to s181 of the Corporations Act 2001 to exercise your powers and discharge your duties as directors of the Trustee in good faith in the best interests of the Trustee”. A series of questions noted that the directors did not convene a meeting to discuss the transaction prior to the finalisation of documentation, and asked for more detail on the deal.
A cursory glance at the Magellan Travel website gives an easy insight into the fury. The group’s mission statement says it aims to “enhance the profitability of Independent Travel Agents and empower them to control their own destiny”. Magellan is “completely transparent and agents are kept fully informed of all commercial dealings,” the site insists — words which now echo hollowly in the ears of the disillusioned members.
The valuation
At first glance there is no wonder the Magellan directors jumped at the opportunity when Helloworld offered a whopping $32.5 million price tag for the group. Perhaps reflecting the adage “if something looks too good to be true, it probably is,” the valuation is a staggering multiple for a business which by definition makes no profit. The Magellan trust deed, established a decade ago to ensure members had control of their own futures, specifically dictates that all profits of the business are to be distributed to the members.
Thus the purchase of the 15% “founding shareholdings” at the most returns 15% of the profits to Helloworld. Moreover, the trust deed also specifies the price to be paid if one of the founders sells, as three times the income generated by that shareholding. It’s widely known that Magellan ceo Andrew Macfarlane paid $750,000 to Kevin Dale when he took over his 5% stake — indicating that Dale and his fellow founders were each reaping $250,000 annually from the business. However they also each contributed $50,000 to “top up” Macfarlane’s ceo salary, making the annual return on the 15% being purchased by Helloworld a total of $900,000.
That means that the $32.5 million price tag equates to a 36 times multiple — that is, it will take 36 years for Helloworld to recoup its investment in the business. Of course, it isn’t that simple– when he announced the acquisition Helloworld ceo Andrew Burnes also carefully noted that the deal would “materially increase the volume of TTV that Helloworld Travel members transact with suppliers in Australia and globally by approximately $900 million”. That was an intriguing statement, given that Magellan agents were told at initial meetings to discuss the offer that a key driver was a lack of growth in sales, and that volumes being directed through the group’s head office were more like $450 million — meaning members were only supporting preferred suppliers in about 50% of cases. Helloworld Travel will definitely see an increase in volume as a result, particular as members switch ticketing to Air Tickets and their volumes are captured by Helloworld preferred agreements with suppliers like Princess Cruises. Burnes said he expected the deal to be “earnings accretive” so clearly he is optimistic about the potential upside. There is also the factor of Helloworld’s status as a publicly listed company – if investors come out in favour of the deal, an increasing HLO share price will more than cover the price paid for Magellan Travel as the company’s momentum lifts.
However suppliers aren’t stupid, with critics of the deal saying those seeking growth will simply reset the Helloworld Travel targets to reflect the increased volume after the first year which integrates Magellan’s turnover.
Another key issue for Helloworld going forward is integration of Magellan among its other brands. Burnes said Magellan would become a “sixth retail network” for the company, operating alongside Helloworld’s branded and associate models, the My Travel Group affiliate members, MTA Travel and the Helloworld Business Travel group. It may be a difficult juggling act for Helloworld to manage the expectations across the different networks — particularly if it’s perceived that some agents are getting a better deal than others.
Competitors circling
The ructions within Magellan have provided an opportunity for rival groups, who were quick to capitalise on the unrest. Express Travel Group ceo Tom Manwaring was one of the first to react, emailing all Magellan members to express his shock at the announcement. “In my view, the purchase by Helloworld drives a reduction in distribution competition and more importantly, removes independent choice for Magellan Travel Group members and agents across Australia,” he said. Manwaring formally announced a “new home” for ex Magellan members to consider, with a new Trust Deed to be jointly and majority owned by the members — and in particular set out to ensure any change of control cannot occur without an all member majority vote.
“The Magellan website highlights how its members “control their own destiny”
CVFR Consolidation joined the fray, saying its wide array of air deals means agents didn’t need to be part of a buying group at all. Travel Partners MD Jeff Hakim highlighted his offer and the importance of agents having access to “a full range of products at the best return to ensure viability,” while consulting group AppliedSense noted that most agency owners are “unable to negotiate the complex override agreements” offered by buying groups.
It is understood that other groups such as CT Partners have also been making pitches to selected Magellan agents, who have clearly been considering all options – particularly a devastated cohort who only left Helloworld for Magellan a matter of months ago.
Where to now?
In happier times: Andrew Jones, Trevor Jones, Andrew Macfarlane and Kevin Dale at the group’s 2010 conference
After the initial reaction to the “low-ball” proposal from directors in late December, the Magellan board upped its offer to a total of about $11 million on 10th January, meaning a third of the cash and shares from Helloworld would go to members. It’s understood this figure was divided on a sliding scale ranging from about $65,000 through to $220,000 depending on individual agent TTV and longevity with the group. While some members were philosophical and inclined to accept the offer, again a significant group — representing about $320 million in TTV — formally rejected the increased remuneration.
Amid the ructions, founder Kevin Dale expressed his dismay at the deal, writing an open letter about the situation which was published in Travel Daily. “How could the idealism of the three founders come to this?” he asked, with Magellan now “riven with dissension, cynicism, anger and disillusionment”.
Shortly before travelBulletin went to press a national summit was convened in Melbourne, with the group flying all members to the Crown Palladium ballroom in an attempt to get the deal through. At the 23 January gathering the beleaguered board once again upped its offer to members, with the revised deal now believed to see two thirds of the proceeds from Helloworld handed onto members — or more than $20 million.
While this isn’t the 85% split sought by some of the activist members, it’s seen by many as a fair compromise, and Dale, who had been set to provide a contribution to travelBulletin about the takeover, has now decided not to take up the opportunity, saying it is time for the healing to begin within the splintered organisation.
“A decade ago, three travel agents came together to found a new travel group. They were united by deep disillusionment over successive sales of Australia’s major travel agency chains to public companies. The members of those chains had no say in this process, and yet it was their success that made the chains attractive to the public companies. Without consultation the management of the chains sold the fruits of the agents’ labours and kept the proceeds for themselves. The three agents pledged their new chain, which they called Magellan Travel, would never be sold without members’ approval. They said this loud and often. Just as loudly and just as often, they pledged a transparent system of distributing income – 85% to all members; 15% to the founders. I know all this because I was one of those three agents and, over the ensuing 10 years, I watched proudly as our vision attracted many other agents and Magellan grew to be a respected, happy and prosperous group. Then on the Friday before Christmas, the directors finalised an agreement to sell Magellan to Helloworld. This was a great shock to me. There was no consultation with members. It was sprung on them. And in stark contrast to the accepted 85-15 split of income, the vast bulk of the $30 million-plus sale proceeds were to go to the directors. As a result Magellan is now riven with dissension, cynicism, anger and disillusionment. How could the idealism of the three founders come to this?” -Excerpt from Kevin Dale’s open letter
Others noted that the new offer would see some smaller members receive more than their businesses are worth, and will be a windfall for those approaching retirement. But a cohort said to represent over $300 million in TTV are hesitant, and were still threatening legal action against the board during the Melbourne crisis meeting.
The directors — Andrew Jones, Trevor Jones, Andrew Macfarlane, Carl Buerckner and Penny Spencer — will need to work hard to regain the respect of many of the senior members of the group. Questions continue to swirl — including details of the income from the deal that each of the quintet will receive and suspicion it is out of proportion to the rest of the group. The revised offer to members, which is believed to include a two year contract with Helloworld, was set to be unveiled just before the end of the month and it remains to be seen whether the “devil in the detail” will continue to dissuade participation in the takeover.
Some conspiracy theorists have conjectured that it’s possible the entire situation was contrived by Helloworld CEO Andrew Burnes, who in a Machiavellian stroke of genius has managed to damage a long-time irritant. If the deal had fallen over – and many believed this was a possibility given the material change to Magellan’s fortunes if the dissenters decided to leave – he would have managed to destroy the rival group without spending a cent. If, as expected, it proceeds as planned, he has brought the wanderers back to the fold, and it will be up to him and his team to prove the negative factors that made the agents leave Helloworld in the first place are now no longer relevant.
The industry looks forward with bated breath to see how it will play out.
