Flight Centre signs JV Implementation Deed

Flight Centre Limited announced late yesterday 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.

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 buy-back commitments.

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 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.

Report by The Mole