For a while there, it looked like the uniquely Australian travel company Flight Centre could have gone under, following the majority of the airline industry around the world.
One of the world’s biggest travel companies, Flight Centre was never a candidate for a government bailout so it was up to the board and management team to drive through ruthless cuts and then ink a $700 million company saving equity raising which was announced yesterday morning.
For anyone who likes travelling or has utilised Flight Centre’s services over the years, the company’s presentation on the raising makes for very interesting reading. Has any retail outlet ever attempted to close 426 stores in Australia?
As for the capital raising, there is a $282 million placement at $7.20 which will dilute the founders and retail shareholders alike, and a $418 million 1-for-1.72 non-renounceable entitlement offer at the same price, which is a 27.3% discount to the last traded price of $9.91.
The three founders — CEO Graham Turner, Geoff Harris and Bill James — went into this crisis owning a combined 42% of the company and have collectively committed to contribute only $25 million of the $175 million they were entitled to in the pro-rata offer.
However, as The AFR’s Rear Window pointed out, each could have afforded to write a much bigger cheque given that they have collectively pocketed a combined $526 million in Flight Centre dividends since 2010.
With the total Flight Centre shares on issue set to almost double, the founders will be diluted down to less than 25% and their current pre-emptive rights agreement will lapse because it is based on the three of them owning more than 35%.
Control of the company is clearly changing and each will now be free to sell to the wider market rather than each other.
There isn’t another ASX200 company with three unrelated founders who were still in control, particularly 38 years after they started the business.
Thirteen years after its 1982 founding, Flight Centre was floated at 95 cents a pop — valuing the company at just $74.7 million. It finished the first day at $1.23, after which it commenced a mighty run to hit a record high of $63 in September 2018 when it was valued by the market at a staggering $6.37 billion. By then, each of the founders were paper billionaires in their own right.
Flight Centre shares opened at $10.85 this morning and settled at $11 after the first 10 minutes of trade, a 10% gain on the last trade, suggesting that the capital raising was excessively discounted.
After a $700 million injection, an $11 share price values the company at $2.2 billion and for those institutional investors who joined the register for the first time at $7.20, they are enjoying paper profits of nearly 40%.
The founders are presumably regretting not stumping up more as they’ve received no compensation for their lapsed entitlements.
James and Harris never sat on the board of the public company and Graham “Skroo” Turner has been the CEO or executive chairman for the past 25 years since the float.
But Turner, now deep into his 60s — a travel industry lifer who initially trained as a vet — has never been through anything like the past month.
Flight Centre has made extraordinary changes starting with a March 13 statement to the ASX withdrawing its earnings guidance of an underlying 2019-20 profit of up to $350 million.
Less than four week later and after a 19 day suspension in share trading, the process finished yesterday with the announcement of a bank-driven $700 million capital raising accompanied by the most brutal culling of its retail network that you could imagine.
By the end of July, the cost base will be cut by $1.9 billion in annualised terms, or $65 million a month. A whopping $210 million will be spent closing 40% of its Australian outlets and farewelling thousands of staff and, much to the chagrin of News Corp and Nine in particular, we’ll never see another sales and marketing spend like the $165.6 million Flight Centre outlayed in 2018-19.
Stockbroking analysts have long predicted that Flight Centre would need to rationalise its 2800 strong global network of outlets as travel bookings increasingly move online, so in a weird way the COVID-19 crisis has actually galvanised the company to bite the bullet once and for all.
And there’s never been a better time to be attempting to renegotiate rents with Westfield and other landlords around the world.
Flight Centre has long had a commission-based sales culture along with a generous staff share scheme, so a fair chunk of the $138 million retail entitlement offer involves the staff. The three founders all committed their stock through the separate $280 million accelerated institutional offers which closed this morning.
When you add in the $282 million institutional placement, this a seismic recapitalisation of Flight Centre involving professional investors.