Big falling out last night between Flight Centre and PEP

A report in SMH’s Business Day this morning says that Flight Centre and Pacific Equity Partners had a dramatic falling-out last night after the sudden collapse of the $1.6 billion private-equity backed takeover of the travel group – the second such failure involving the pair in just five months.

The controlling shareholders of Flight Centre, led by founder and managing director Graham Turner, pulled the plug on the deal after the release of an independent expert’s report that valued the business some $300 million to $400 million more than the joint bid.

But the move stunned PEP, which was left perplexed by the timing and the decision by their partners not to engage in talks to keep the offer alive.

It is understood PEP and its advisers only found out that Mr Turner and his fellow founders who control 57 per cent of Flight Centre intended to vote down the deal, effectively killing it, around 20 minutes before the company alerted the stockmarket yesterday morning.

The two groups had still not talked to each other by late afternoon which prompted PEP to issue a statement giving voice to the confusing events surrounding the release of Ernst & Young’s report that put a price tag of between $1.9 billion and $2 billion on Flight Centre.

“A number of assertions made in [Flight Centre’s] statement are inconsistent with recent discussions with the company,” the private equity firm claimed. “PEP wishes to verify these matters and the position attributed to the founders by the independent directors before deciding on next steps.”

“Flight Centre’s independent directors, headed by chairman Bruce Brown, said the higher value put on the company by the independent expert’s report prompted them to abandon support for the bid.”

Under the terms of the deal, which would have created a joint venture company to privately run the business, Flight Centre’s shareholders would have owned 70 per cent and PEP 30 per cent.  The bid valued the current listed entity at around $17 a share.”

PEP was proposing to pay $195 million for its stake and load up the bidding vehicle with $960 million of debt.

The proceeds would have been used to pay cash to those existing investors who did not want to continue holding shares in Flight Centre.

But Ernst & Young declared the offer was neither fair nor reasonable given that the value of the business would probably be higher after the deal than before.

The report also raised the prospect of a large capital gains tax bill for shareholders. Mr Brown said the costs involved in doing the deal and the tax considerations made it far less attractive to shareholders.

Mr Turner told the Herald that while he would “never say never” he didn’t hold out much hope of resurrecting the offer a third time.

As for Flight Centre remaining a public company, he said: “We have got to make the best of our situation as it is.”

The collapse of the latest bid followed the voting down by rebel shareholders of the first proposal at the end of February on the grounds that the initial offer was too low.

Since then, Flight Centre has twice upgraded its profit forecasts while its shares have soared to just under $20 – close to Ernst & Young’s valuation range of between $20.04 and $21.05.

News of the company’s decision to terminate the deal saw the stock suffer a 6 per cent fall on the sharemarket yesterday, down $1.15 to $18.12.

Report by The Mole