Sabre said Thursday it would sell its general airline IT outsourcing business to EDS for $670 million. At the same time, Sabre announced that it would make EDS its general IT provider as well.
The two companies will jointly market some products in a partnership in which EDS essentially provides the foundation technology, with Sabre building on top of that with its airline and travel expertise.
also will retain net working capital of $108 million, bringing the total value of the agreement to Sabre to $778 million.
It is a logical move, Sabre is divesting itself of a capital-intensive, relatively low margin business and freeing itself to hone its core competency: travel. Sabre is retaining the part of its business that is airline and travel specific.
That means Sabre will continue to do work such as yield management, crew scheduling or fleet planning, according to Eric Speck, Sabre’s executive vice president of marketing and sales. But, over the years, in providing those sorts of technology for solutions for airlines, it also has found itself doing more generic work such as payroll functions, telecommunications and other functions that are more general business automation—functions that happen to be EDS’s strength. This transaction will expand EDS’ footprint in one of the economy’s growth segments - strategic infrastructure outsourcing.
“They’ve got scale,” said Speck. and that is why Sabre is outsourcing its own internal systems to EDS. It is awarding EDS a 10-year $2.2 billion service contract to EDS to manage Sabre’s IT systems.
In selling its IT outsourcing business Sabre is selling a portion of its business that accounted for 25% of its revenues—but not for 25% of its profits. The IT business was capital-intensive and lower margin than other businesses Sabre is in, according Speck. This business line includes its outsourcing contracts with airlines such as American Airlines and US Airways. EDS will buy all of Sabre’s data center, data management assets and resources.
“Airlines are very concerned about their distribution costs,” said Speck. Outsourcing should generate cost savings for Sabre—savings that Sabre should be able to pass on to its airline customers.
But Sabre will keep its core travel marketing and distribution business, including intellectual property and assets as well as other businesses that are highly synergistic to the core business. The retained businesses include its applications software products suite, software intellectual property and reservations hosting business and other emerging business activities.
Additionally, Sabre and EDS will collaborate on marketing efforts. Part of this includes merging EDS’s airline solutions software portfolio into Sabre’s. Until the sale, Sabre and EDS were sometime competitors because EDS sells an internal airline res system now used by 26 airlines.
Sabre and EDS will jointly market Sabre’s portfolio of airline software solutions, combined with EDS’ global technology capabilities, e-business consulting and channel development expertise and its A. T. Kearney high-value consulting practice. As part of the joint agreement, EDS will contribute approximately $20 million over the next two years for product development in Sabre’s software business, in particular to adapt Sabre’s airline software portfolio to an Applications Service Provider model. EDS expects to profit from this investment through a revenue-sharing agreement.
The market responded positively; Sabre’s stock had gone up to $4.72 by early afternoon of the day of the announcement. EDS’s stock increased, although not as much.