The Cendant Corporation, which owns Avis car rental and the Days Inn hotel chain, is expected to announce today that it has agreed to acquire Galileo International, an electronic travel reservation business, for slightly more than $2.9 billion in cash and stock, according to executives close to the talks.
The transaction would propel Cendant into the leading ranks of the travel reservation industry and give it a formidable tool that would help it steer business to its other travel franchises like Howard Johnson, Ramada, Days Inn, Super 8 and Avis. Cendant, which owns WizCom, a unit that helps travel companies connect to travel-reservation services, is also negotiating to buy Worldspan, a reservations system operated by Delta, Northwest and T.W.A. But a deal for Worldspan was not seen as imminent, the executives said.
The boards of both companies approved the deal yesterday, the executives said. Under the terms of the agreement, Cendant will pay $33 a share, a 10.7 percent premium to Galileo`s share price of $29.80 on Friday. Of the $33, 80.5 percent, or $26.565, will be paid in stock, and the rest, $6.435, will be paid in cash. If shares of Cendant, which closed at $18.45 on Friday, fall below $17 or above $20, the terms of the deal will be adjusted to approximate the current value. If either company breaks off the deal, it will have to pay a $100 million fee. Cendant will also assume slightly less than $611 million in debt. Representatives of Cendant and Galileo declined to comment.
The acquisition would give Cendant control of Galileo`s travel reservation system, which handles 92 billion transactions a year. Galileo is the No. 2 player behind the Sabre Holdings Corporation, which operates the Sabre reservation system and also controls the Travelocity .com Web site. Galileo`s networks connect about 43,000 travel agency sites to 505 airlines, 37 car rental companies, 47,000 hotel properties, 368 tour operators and the major cruise lines.
In Galileo, Cendant would be getting a company in an industry that has been a pioneer in using computers for competitive advantage. More than 40 years ago, led by American Airlines, the creator of Sabre, the major airlines began investing heavily in computer-driven reservations and fare data systems. Many grew into joint ventures and, eventually, public companies. Galileo has its roots in United`s Apollo reservation system, which was used by Covia, a partnership of North American and European airlines. Covia merged with Galileo, a reservation system based in Europe, to form Galileo International in 1993. The company went public in 1997.
As the airline reservation operations matured, they began directly linking travel agents into the systems and adding related information like hotel, cruise ship and rail travel offerings to their databases.
“The terminology and principles of e-commerce today are things we`ve done for a long time,” said Frank Auer, vice president of systems and operations for Galileo.
In the jargon of the industry, Galileo and its rivals morphed from so- called C.R.S.`s (computer reservation systems) into G.D.S.`s (global distribution services). The major unknown, analysts and industry experts say, is just what role such services will play in the future. At the moment, they form a $4.5 billion industry, but it is growing slowly at best, said Glen Greene, an analyst at ABN Amro in Chicago. Travel agents, the traditional source of most of their revenue, are being squeezed by narrower margins and competition from Web sites.
At the very least, Galileo and its rivals are likely to serve as pipelines for data distribution to travel agents, corporate travel departments and online consumer travel portals for years to come. Travelocity relies heavily on its owner, Sabre, and the bulk of Expedia`s data comes from Worldspan because it is not easy to replace—or find the experts to run—computer systems like those of the global distributors.
Galileo`s system, which processes 7,000 transactions a second at peak periods, runs 24 hours. Its average response time is less than two seconds. Indeed, Galileo`s computer system not only runs its business but supports the computer operations of United Airlines and is marketed to other businesses as a site that can run their Internet applications.
Still, Galileo`s strategy is mostly focused on using information processing and Internet expertise to keep travel agents in business while expanding Web-based services to other audiences, including, through its Trip.com subsidiary, consumers who want to make travel plans without dealing with agents.
Analysts say that Galileo will not deliver much long-run value to Cendant unless it succeeds in its drive to grow as a packager and provider of a broad range of travel and entertainment services.