By Ken Schachter

Private equity investors are taking over the travel reservation industry, hoping to reap big returns from the undervalued sector.

The latest target is Southlake, Texas-based Sabre Holdings, owner of the biggest travel booking system in the United States. Private equity firms Silver Lake Partners and Texas Pacific Group announced last week that they will buy Sabre for about $4.5 billion in cash and the assumption of $550 million in debt, making Sabre—which also owns travel site Travelocity—the second of the top three U.S. booking systems to exit the public markets within a year.

In August, private equity firm Blackstone and a partner paid Cendant $1.4 billion for its Travelport unit, the parent of Sabre competitor Galileo and online booker Orbitz. And earlier this month, Blackstone struck again, agreeing to buy closely held Worldspan, which runs the reservation systems for Delta Air Lines and Northwest Airlines, for $1.4 billion and plans to combine it with Galileo.

Industry observers say travel reservation companies, which were crippled by the September 11 attacks, are prime buyout targets because many are now rebounding as travel spending picks up. After declines in 2001 and 2002, overall U.S. travel spending is forecast to grow 4.6 percent in 2006, according to the Travel Industry Association. “Absent the three horsemen of gas prices, terrorism, and economic cycles, there’s a long-term trend” upward in global travel, says Johann Wong, managing director of hedge fund researcher Lipper HedgeWorld.

So private equity investors, who are under enormous pressure to park their billions, see big returns in travel reservation companies. Doing a leveraged buyout, such as the Sabre deal, can yield rich management and consulting fees for private equity groups. “You’ve got to invest that money to start getting paid,” says Jeff Matthews, general partner at Ram Partners, an Atlanta-based hedge fund. “The clock is ticking. The pressure is to do deals so you have liquidity events fast.”

Sabre’s legacy business and largest unit is its computerized global distribution system through which online and offline travel agencies and corporate travel departments book airline trips, hotel rooms, and car rentals. Sabre’s system accounted for 59.7 percent of total revenues in 2005, while Travelocity accounted for 30.7 percent. A third unit, Sabre Airline Solutions, which sells passenger software and services to airlines, generated about 9.6 percent of revenues.

Dying Business?

Industry observers say Sabre, which was created by American Airlines in 1960, is a good investment because its distribution business is still growing, albeit slowly, and picking up market share from its second-largest rival, Worldspan. More than a year ago, travel site Expedia, an exclusive Worldspan customer, began transferring some bookings to Sabre.

George Sakellaris, an analyst at Baltimore-based Garp Research, says the entry of private equity investors into the travel reservation sector comes in the nick of time to snare Sabre at a discount. “If they let a few more quarters go by, its core valuation over the last few years might creep up,” he says. “You might get a taste that this ‘dying business’ has an upside.”

Menlo Park, California-based Silver Lake Partners and Texas Pacific Group of Fort Worth, Texas, haven’t disclosed their plans for Sabre after the deal closes next year, but some analysts speculate the investors will sell Travelocity to recoup some of their investment.

The travel sector isn’t the only place private equity is looking to make a killing these days. Private equity firms appear to be scoping out any and every company that’s undervalued or troubled. And they’ve finally started sniffing around some of tech’s biggest names, pointing to Dell, EMC, and Yahoo as potential buyout targets, according to a source familiar with the situation.