Flight Centre Reaches In-Principle Agreement with PEP

Flight Centre Limited (FLT) today reached in-principle agreement on the commercial terms of a proposed leveraged joint venture with funds advised by Pacific Equity Partners (PEP).

The in-principle agreement means that FLT and PEP will now proceed to negotiate and finalise an Implementation Agreement as soon as possible.

Under the terms of the agreement, it is proposed that PEP will purchase a 30% economic interest in a leveraged joint venture to be formed to acquire the FLT business’s operational assets. PEP’s minority holding will increase to one-third if the business achieves certain targets.

FLT shareholders will effectively retain an initial 70% economic interest in the joint venture’s business via their existing FLT shares. This interest will reduce to twothirds if the targets are achieved.

FLT expects to receive about $1.1billion in cash proceeds from the transaction, to be sourced from debt facilities entered into by the joint venture and the amount paid by PEP ($195million) in acquiring its economic interest.

It is proposed that the substantial part of these proceeds will be returned to FLT shareholders as a combination of cash and franking credits via an off-market buyback of FLT shares. The proposed buy-back is expected to be structured along similar lines to that proposed during the previous privatisation proposal and will be implemented by way of a scheme of arrangement.

FLT’s directors intend to offer a mechanism that allows smaller shareholders to exit in full for a cash amount per share (yet to be determined) if they do not wish to indirectly hold a continuing interest in the leveraged, restructured FLT business.

In addition, FLT shareholders will receive a $0.40 per share fully franked final dividend for the current financial year. The final dividend is expected to be paid prior to the transaction’s completion.

The sale of the FLT business to the joint venture will be subject to approval by an ordinary resolution of shareholders at a FLT shareholders’ meeting and will not be conditional on the outcome of the scheme of arrangement to facilitate the subsequent off-market buy-back of FLT shares.

Prior to any such meeting, an independent expert will review and evaluate both the sale transaction and the proposed scheme of arrangement.

The scheme of arrangement to facilitate the subsequent off-market buyback of FLT shares will be subject to a resolution passed by 75% in value and 50% in number of shareholders present and voting at that meeting.

FLT chairman Bruce Brown said: “This proposal has the potential to benefit FLT and its shareholders, including those who do not wish to maintain an investment in what will become a highly leveraged vehicle.

“In particular, it will:

  • Enable Flight Centre to release a significant cash amount to shareholders
  • Introduce a disciplined and experienced strategic partner in PEP, with a strong track record of delivering high returns
  • Deliver an attractive cash exit opportunity for smaller shareholders via a taxeffective off-market buy-back
  • Provide those Flight Centre shareholders who choose not to exit with the opportunity to participate in the FLT business’s future upside potential, which is evidenced by the company’s recent upgraded profit outlook for the current year, and
  • Create the potential for enhanced returns by introducing significantly greater leverage than can be practically obtained under the status quo.”

The creation of the leveraged joint venture will not affect the travel agency business’s day-to-day operations.

Under the proposed arrangements, Graham Turner will continue as the Flight Centre business’s managing director and will sit on the joint venture’s Board. The joint venture’s Board will also include two representatives nominated by PEP, two representatives nominated by FLT and the joint venture CFO.

FLT and the joint venture will have at least one common director and FLT shareholders will be kept informed of developments in the Flight Centre business in accordance with FLT’s usual disclosure obligations.

The joint venture’s cash flow will primarily be used to service the business’s new debt facilities.

FLT and PEP intend to work together over the near term with a view to signing a formal Implementation Agreement as soon as possible.

FLT will inform shareholders of material developments as they occur.