An Open Letter to Sabre CEO Sean Menke

01/29/18 03:45PM EST

Editor's Note: Our Technology analyst Ami Joseph is hosting a special Black Book presentation to discuss his change of position from bear to bull on shares of Sabre (SABR). The call is on Friday, February 2nd at 12:30pm ET. Email sales@hedgeye.com for more information.

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Dear Sean,

Congratulations on retiring your CFO. It was a bold and necessary step. On his advice the company has wasted hundreds of millions of cash dollars on shareholder return. There is no excuse for wasting a precious resource in a heavily levered, cash-strapped company. On his watch, Sabre returned just enough cash to shareholders annually to make the program completely better to ignore. Like throwing a toothpick into a barn. The cash spent was too low to make shares of Sabre a BUY, and it was a costly penalty to actually doing the right things for the business. Consider: adding up cumulative cash return for the last few years makes it the biggest category of investment for Sabre since going public, bigger than the price of Abacus, and with little or no long term reward (unlike Abacus). Wouldn’t you like to have that $700m back right about now?

The other big waste of capital is the TRA. If your CFO can’t negotiate with the landlord on the TRA, and you don’t want to, I suggest you call me and I will do it for you. Your PE overlords are your biggest shareholders. They are draining cash out of a thin pile, limiting your options for growth and success, and thus reducing the overall value of the company.  What is more valuable to them – the ~$270m of TRA remaining or the $1.6b of equity they are holding? They have to decide. I am not saying they haven’t richly deserved the cash benefit of the tax savings they afforded Sabre by crushing the company with debt. I am suggesting we restructure the payment schedule. Pay the remaining amount over ten years (at the same Libor+1).

Now I have just saved you from wasting almost $400m per year in cash. ‘Thank you’: you’re welcome. What to do? Step one: let’s get you some more cash. You are spending ~$156m per year on interest expense, most of which is a cash expense. Your debt is not an asset. It was not put in place to buy a major peer; it was not put in place to transform the company; it was not put in place to do a levered re-cap so that current shareholders could benefit from similar earnings on narrower shares. It was put in place over a decade ago to make the shareholders of two private equity companies wealthy. The debt helps no one at Sabre today. It is an albatross. Get rid of it and benefit from a ~30% boost to FCF. How?

$400m per year is a start. But you will need to accelerate this process. I propose: if you are successful at laying out a multi-step plan to invigorate Sabre you will have an opportunity to do a debt for equity swap along the way. If that sounds too painful considering the likely exit of your overlords, then use equity for M&A. Using equity for M&A will make you even more disciplined about affording the cost of important deals because you know there will be an immediate and likely pain point reaction. Never mind: it is time to do the right things for the long term and not the short term.

Next step: Do NOT run the company for the benefit of marginal profits to the shareholders. On a sadly popular website for Sabre employees, one of your C suite team members recently explained the need to fire ~1,100 hard-working employees based on the need to run the company for the profit of the shareholders. Hogwash. If you want to be a technology company that wins, run the company for the delight of the customers. Make your product #1. Make your service #1. If you make your product #1 and you make your service #1 then the financial model problems will solve themselves and the shareholders of the company will be rich because they bet on your transformation. But if all you are doing is trying to keep shareholders happy with marginal profits and marginal returns on a platform that continues to have major issues, eventually that will end badly for everyone. Maybe you will have retired by then. Maybe you don’t care because you will have a golden parachute. But it is possible for you to establish your legacy as the person who transformed Sabre from a dragging product and technology company that is shackled by the past into a technology company that innovates and drives that innovation into the market. Your customers will win, your employees will win, and lastly: your shareholders will win.

You have a long road of investment and change in order to get there. Freeing up the $400m of cash per year to give you wiggle room to invest in a transformation is a critical breathing room to enable the investment in transformation. How do you make that transformation? One step at a time.

Sincerely,

Ami Joseph

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