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Flight Centre flies into acquisition rumour mill

It would be interesting to see how the Corporate Travel Management Ltd (ASX: CTD) share price moves today after a report surfaced that it may have had informal merger talks with Flight Centre Travel Group Ltd (ASX: FLT).

The rumour could put some interest back into the CTD share price, which tumbled 3% on Thursday after management announced its chief financial officer Steve Fleming was stepping into a new role to focus on the group’s European operations.

Corporate Travel has been marred in controversy since a hedge fund flagged concerns about its accounting practices and questioned the profitability of the group.

The Corporate Travel share price has held up reasonably well considering as it’s only dipped around 3% when the Flight Centre share price tumbled 31% compared to the Webjet Limited (ASX: WEB) share price, which is up 30% and the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index’s 8% gain.

Did Flight Centre and Corporate Travel discuss a merger?

Merger and acquisition (M&A) rumour could do the Corporate Travel share price some good although Flight Centre’s head honcho Graham Turner dismissed this possibility, reported the Australian Financial Review.

However, the AFR noted that Mr Turner didn’t deny having an informal chat about a possible tie up with Corporate Travel – he didn’t admit it either so read what you like into that!

The question isn’t so much about whether the two groups have talked about a marriage but whether such a tie-up would yield a better outcome for their shareholders.

Does a merger make sense?

The good thing about the corporate travel market is that it’s not price sensitive and clients (typically businesses) tend to be sticky.

The downside is that corporate travel agencies tend to require larger working capital as they may have to pay their suppliers first (e.g. airlines) and wait for payment from customers.

Meanwhile, Flight Centre (which is more exposed to the leisure market) is underperforming due to wage costs and nervous consumers who are reluctant to make big discretionary purchases as property prices fall.

I had the opportunity to chat with the boss of a small travel agency franchise last year about whether he had thought about expanding into corporate travel and he said he had as travel agents are attracted to the greater earnings stability of having corporate clientele but it was the working capital requirements that kept him away.

Adding a large corporate travel portfolio to Flight Centre’s business will offer diversification but there aren’t may real cross synergies between the two businesses outside of cutting head office costs.

I think the argument could be made either way for a merger but it will ultimately come down to price. If the CTD share price were to fall harder, it may find itself in the crosshair of an acquirer even if this isn’t Flight Centre.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and Flight Centre Travel Group Limited. The Motley Fool Australia has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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