Implementation Deed Signed - Joint Venture with Pacific Equity Partners

Flight Centre Limited (FLT) today announced that the Implementation Deed for the proposed leveraged joint venture with Pacific Equity Partners (PEP) had been signed and agreements reached on key transaction arrangements.

The Implementation Deed documents key aspects of the proposal and formalises FLT and PEP’s in-principle agreement (announced May 14), ahead of a proposed shareholders’ meeting to approve the transaction. All FLT shareholders, including the company’s founders, will be eligible to vote at this shareholders’ meeting and at the subsequent meeting to approve a related off-market buy-back of FLT shares.

Under the Implementation Deed’s terms:

  • PEP will initially invest $195 million for shares representing a 30% economic interest in a joint venture entity formed to acquire the FLT business’ operational assets. This economic interest will increase to one third if PEP achieves certain threshold returns on its investment (see the summary of the Implementation Deed in the Annexure). A separate conditional agreement has also been reached to allow FLT to put up to an additional 19.9% economic interest in the joint venture to PEP at a price equivalent to PEP’s initial entry price if FLT requires additional funds to meet its shareholder buyback commitments (as outlined later in this announcement).
  • FLT will initially hold a 70% economic interest in the leveraged joint venture via shares and convertible notes to be issued to FLT in exchange for the FLT business’s sale to the joint venture. This economic interest will reduce to two thirds if the threshold returns referred to above are achieved. Any additional JV equity put to PEP by FLT will also be subject to an equivalent uplift factor.
  • FLT will initially receive approximately $1.1billion in cash proceeds, to be sourced from debt facilities entered into by the joint venture and the amount paid by PEP in acquiring its economic interest.

FLT’s directors intend to offer an off-market buy-back to return a substantial part of the cash proceeds to shareholders who do not wish to continue to hold an interest in the leveraged, restructured FLT business.

The directors expect to offer exiting shareholders a minimum of $16 per share under the buy-back, with the potential to increase the price to a maximum of $16.50 dependent on the capital gains tax payable on the transaction.

The buy-back’s cash and franked dividend components are yet to be determined by FLT and will ultimately be subject to an Australian Taxation Office ruling, however, on the basis of discussions with the ATO in relation to the previous privatisation proposal it is anticipated that there will be a significant fully franked dividend component of the buy-back price.

If the buy-back proceeds, FLT’s founders and majority shareholders, Graham Turner, Geoff Harris, Bill James, Jim Goldburg and Chris Greive, intend to support the proposal and have agreed to limit their participation to a maximum of 40% of their collective holdings, a total of 22 million shares, scaling back to ensure that all other shareholders that participate in the proposed buy-back will have the opportunity to do so for up to 100% of their shareholdings.

To ensure FLT has sufficient funds to buy-back up to 20.7 million founders’ shares after accommodating all minority shareholders who choose to exit, FLT has agreed to raise additional funds, if needed, by requiring PEP to acquire additional joint venture equity. In this event, FLT will receive $6.5million for every additional 1% of joint venture equity PEP acquires, subject to FLT retaining a minimum 50.1% economic interest in the joint venture.

FLT chairman Bruce Brown said the proposed transaction had the potential to produce benefits for FLT and its shareholders, both those that chose to exit and those that elected to maintain an investment in the restructured and aggressively geared company.

“This transaction gives the business and its continuing shareholders access to PEP’s experience and expertise while, at the same, provides exiting shareholders with the opportunity to participate in a tax-effective off-market buy-back,” Mr Brown said.

In addition to the opportunity to participate in a buy-back, all FLT shareholders will receive a $0.40 per share fully franked final dividend for the current financial year. This follows a $0.20 per share fully franked interim dividend (paid in March).

The final dividend, a 25% increase on the payment for the previous corresponding period, reflects a stronger than expected second half performance from FLT.

Based on preliminary accounts for the 11 months to May 31 2007 and subject to performance during the critical final weeks of June, FLT expects to achieve a full year pre tax profit 25-30% above last year’s result, excluding the abnormal $22.4million gain from the sale of FLT’s Adelaide Street headquarters in September.

FLT managing director Graham Turner said strong results during the March-May period had underpinned the company’s growth, continuing the renewed momentum flagged to the market in FLT’s April 27 2007 profit outlook announcement.

“Our second half performance, particularly late in the period, has been encouraging, after sluggish sales and relatively disappointing profit results during the first half,” he said.

FLT expects to release its audited full year accounts on August 23 2007, ahead of the shareholders..meeting to approve the PEP transaction.

FLT and PEP have also signed a separate Shareholders’ Deed today setting out various structural aspects and key operating protocols that will apply if the transaction is approved.

The Shareholders’ Deed will be set out in further detail in an explanatory memorandum that will be distributed to shareholders ahead of their meeting and is summarised in an annexure to this announcement. The Implementation Deed’s key terms are also described in the annexure to this announcement.

The proposal to create a leveraged joint venture is subject to approval by an ordinary resolution of shareholders at a meeting expected to be held before the end of August 2007. Documents relating to this meeting, including an Independent Expert’s report, are expected to be issued in July 2007.

Commenting on the signing of the Implementation Agreement, PEP managing director Rob Koczkar said: “PEP is delighted to have reached formal agreement with the FLT Board to create a joint venture of the Flight Centre business. In addition to creating significant tax-effective liquidity for FLT shareholders, this transaction provides them with the opportunity to participate with us in Flight Centre’s next phase of growth. We look forward to partnering with the Flight Centre team to help realise Flight Centre’s full potential over the coming years, driving returns for all investors in the business”.

If the PEP joint venture transaction is approved, FLT will confirm details for a subsequent shareholders’ meeting to approve the proposed buy-back which it is expected will proceed by way of scheme of arrangement. The formation of the leveraged joint venture is not conditional on this subsequent approval.

FLT will inform shareholders of material developments as they occur.

ABN AMRO Morgans Corporate and Allens Arthur Robinson are advising FLT. Caliburn Partnership and Gilbert + Tobin are advising PEP.

Enquiries to Haydn Long 0418 750 454


The Implementation Deed ( “Deed” ) between FLT and PEP sets out the framework for the parties to implement the transactions necessary to establish the proposed leveraged joint venture. The key transaction steps are set out in the Deed as follows

(collectively the “Transactions”):

  • Restructure Transaction: FLT agrees to:
    • establish wholly-owned subsidiaries to hold the Australian assets and liabilities of the FLT business and the shares in the Australian operating subsidiary companies of FLT and the new travel agency licence required to operate the FLT business in Australia under the joint venture;
    • draft and execute the transaction documents ( “Intragroup Agreements”) to give effect to, and to procure, the transfer of assets, liabilities and shares described in the preceding bullet point;
  • Group Acquisition Transaction: FLT and PEP agree to:
    • transfer all the shares in the wholly-owned subsidiary companies described above and shares in all the foreign operating subsidiary companies of FLT to entities comprised in a joint venture between FLT and PEP in consideration for the net cash proceeds obtained by the joint venture under the Joint Venture Funding Transaction, the issue of shares in the joint venture holding company ( “JV Co” ) and the issue of convertible notes by JV Co;
    • draft and execute the transaction documents ( “Group Acquisition Agreements” ) to give effect to, and procure, the transfer of the shares described in the preceding bullet point;
  • Joint Venture Funding Transaction: FLT and PEP agree to facilitate the:
    • drawdown by the joint venture of $960 million in debt funding under facility agreements to be agreed with financiers ( “Facility Agreements” ); and
    • subscription by PEP for shares in JV Co for its $195 million investment,

and such amounts will together fund the cash consideration (less transaction fees and costs) payable by the joint venture to FLT for the transfer of shares under the Group Acquisition Transaction.

Performance Hurdle

Following completion of the Transactions, FLT and PEP will hold an equal number of shares in JV Co, but FLT will hold an initial 70% economic interest in JV Co through its holding of notes convertible into shares. The convertible notes will contain a performance hurdle that, if satisfied, will reduce FLT’s economic interest from 70% to two-thirds in the JV Co (thereby increasing PEP’s interest from 30% to one-third). The performance hurdle requires PEP to achieve a return on its original investment in the joint venture equal to or in excess of an internal rate of return of 20% on PEP’s  exit in full from the JV Co.

Key dates

  • In addition to the shareholders’ agreement to govern the management of JV Co signed today, FLT and PEP agree to use reasonable endeavours to execute the Group Acquisition Agreements, Intragroup Agreements and other transaction documents on or before 30 June 2007.
  • The sunset date for implementation of the Transactions is 30 September 2007 ( “Sunset Date” ) or such other date as FLT and PEP agree in writing.

Conditions to the Deed

FLT and PEP’s obligations under the Deed are subject to the following conditions having been satisfied or waived in accordance with the Deed and otherwise permits the party who has the benefit of the condition to terminate the Deed:

  • foreign investment regulatory approvals in Australia and New Zealand and the issue of substantially all Travel Agency licences from relevant travel industry regulatory authorities are granted or obtained and not withdrawn, cancelled or revoked prior to implementation of the Transactions;
  • no order issued by any court of competent jurisdiction or the Takeovers Panel or other legal restraint or prohibition is in effect between the date of the Deed and the Sunset Date which prevents the consummation of any aspect of the Transactions;
  • FLT not undertaking or being subject to any action prohibited in the Deed relating to matters such as capital reorganisations, winding up, appointing a liquidator, administrator or receiver, acquiring or disposing of assets with an aggregate value above $2.5 million or entering into or varying material contracts;
  • no material adverse change occurs in respect of FLT;
  • the representations and warranties of FLT set out in the Deed are true and correct;
  • the representations and warranties of PEP set out in the Deed are true and correct;
  • no later than 5 Business Days prior to the Sunset Date, the joint venture has executed the Facility Agreements to access the debt funding amounts on terms that are acceptable to FLT and PEP;
  • no later than 2 Business Days prior to the Sunset Date, all conditions to drawdown under the Facility Agreements are satisfied or waived in accordance with its terms;
  • no later than 5 Business Days prior to the Sunset Date, the joint venture shareholders’ agreement is signed by FLT and PEP;
  • no later than 10 Business Days prior to the Sunset Date, all Intragroup Agreements are signed;
  • no later than 5 Business Days prior to the Sunset Date, all Group Acquisition Agreements are signed; and
  • FLT has obtained a waiver of all relevant ASX Listing Rules or all FLT shareholder approvals required under any ASX Listing Rules are obtained.

Break fees

A break fee of $10 million will be payable from FLT to PEP if:

  • a party other than PEP or a related entity acquires at least a 50% interest in FLT or acquires an interest in all or a substantial part of the business or assets of FLT, or acquires control of or merges or amalgamates with FLT;
  • the FLT Board publicly recommends that a proposal from a party other than PEP or a related entity is in the best interests of FLT and its members;
  • the implementation of the Transactions has not occurred by the Sunset Date due to non-compliance by FLT with its obligations ; or
  • PEP terminates the Implementation Deed for a material breach by FLT.

A break fee of $1.5 million will be payable from PEP to FLT if FLT terminates the Implementation Deed for a material breach by PEP.


FLT and PEP have agreed the terms of the joint venture Shareholders’ Deed which regulates the processes for decision making at the joint venture board level, future funding of the joint venture and the exit mechanism for the joint venture shareholders, among other things. The terms of the Shareholders’ Deed are broadly on customary terms for a transaction of this nature. Specifically, there will be equal representation of FLT and PEP on the joint venture board and material decisions will require the consent of both directors appointed by FLT and directors appointed by PEP. Neither party will be obliged to contribute further funding to the joint venture. However, if further shareholder funding is required, the shareholders will be entitled to contribute that funding on a pro rata basis. Customary pre-emptive rights among the joint venture shareholders apply to transfers of interests in the joint venture, but are altered to reflect that FLT is a listed company (and is therefore subject to additional regulation, including the ASX Listing Rules, and has different processes for raising equity capital) and that PEP, as a private equity fund, requires a clear mechanism to be able to exit its investment after an appropriate period of time (in this case, two years).

As referred to above, a detailed summary of the terms of the joint venture Shareholders’ Deed will be set out in an explanatory memorandum that will be  distributed to shareholders ahead of their meeting.