Shares of American Express Co. (AXP - Analyst Report) (AmEx) rose 0.6% following the announcement of spin-off of 50% of its Global Business Travel (GBT) division through a joint venture (JV) with an investors’ consortium led by Certares International Bank LLC. The decision is backed by the company’s intention to revamp its corporate travel card operations.
Per the agreement, AmEx will retain 50% stake in the JV, while the group from Certares will hold the remaining share by making an investment between $700 million and $1.0 billion. The proceeds will be used for the development of GBT, whose total value is estimated at nearly $2.0 billion.
Pending regulatory approvals, this JV deal is scheduled to culminate by mid-2014, following which AmEx is also projected to realize gains from the transaction. AmEx appointed UBS AG (UBS) as its lead advisor.
Certares enjoys expertise in the global travel industry, led by a veteran chief investment officer of JPMorgan Chase & Co. (JPM - Analyst Report). On the other hand, GBT embraces a wide scale of operations with its business in over 138 countries. In 2012, GBT generated $1.94 billion in global commissions.
However, AmEx is facing challenges in competing with the steady shift toward online travel agencies and other digital services in the industry, which are primarily based on higher operating costs. Higher expenses also impelled the company to slash its headcount, primarily in the travel business, by about 5,400 in Jan 2013. Consequently, employee headcount is expected to decline by 4−6% in 2013.
The latest JV deal blends well with AmEx’s strategy of accelerating its travel business, which constitutes corporate travel spending of more than $19 billion. Moreover, the enriched industry experience of both the parties involved in the JV is expected to swiftly improve its business-to-business payment solutions and create valued synergies, while also enable the expansion of its corporate client base.
Predicaments to engage in non-financial activities owing to banking regulations also impelled AmEx to divest its publishing business to Time Inc., a division of Time Warner Inc. (TWX - Analyst Report), earlier this month, for an undisclosed amount. The deal is slated to close by the end of 2013, subject to customary closing conditions.
Hence, we believe such restructuring will help AmEx consolidate its overall business and enhance its operational leverage. Along with AmEx, Visa Inc. (V - Analyst Report) and MasterCard Inc. (MA - Analyst Report) carry a Zacks Rank #2 (Buy).