Reports filed with the Australian Securities and Investments Commission show Zuji Pty Ltd has accumulated losses of almost A$33 million through its Australian corporate history.

In 2010 it lost A$6m. In 2009 it dropped A$7.6m. In 2008 losses amounted to A$2.6m. And so on.

Meanwhile, analysts estimate Zuji lost -A$3.6m across its entire regional business, which includes operations in Singapore and Hong Kong, in 2012.

Owner Travelocity is selling the online travel agent to Webjet for US$25m in a transaction due to settle this quarter.

An initial report in after the transaction was announced in December suggested Zuji was profitable.

This was based on a statement from Webjet stating it had paid US$25m for Zuji at an estimated price earnings multiple of 4.6x for 2012, implying a profit of around US$5m.

However, I missed the part where Webjet said the 4.6x estimate included $9m in projected synergies for 2012.

In other word synergies that hadn’t occurred applied to a year that has already passed.

Anyway, taking this information into account, it turns out Zuji will post the estimated  -A$3.6m loss referred to above , for 2012.

That’s an awfully long way from profitability, which of course changes the complexion of the acquisition.

It becomes a turnaround tale, a major challenge for Webjet, which has seen its share price rise 27% since the deal was announced.

Analyst Armino Soemina from JP Morgan says: “The strategic rationale was to build scale quickly in Asia and in the newer products of hotels and dynamic packaging.

“WEB aims to turnaround the ZUJI business as it believes it has an inappropriate cost structure which the company can rationalise.

“But not without execution risk.

“ZUJI posted a loss of A$3.6m in CY12 and has posted losses in every year since founded. WEB has factored in $9m of synergies to justify the multiple paid.

“We do think these synergies are achievable, however, with some based on the restructuring of commercial arrangements for ZUJI on WEB’s better terms.

“WEB has grown its share of both domestic and international travel steadily over the past few years and we believe this will continue given the relative under-penetration of international flights – only ~15% vs. domestic flights of 80%.

“But competition is intensifying. It is relatively easy to start a travel website and many new ones have emerged recently.

“However, it is hard to build scale and WEB has been able to do this through its first-mover advantage organically.

“Supplier power is also extremely high, however.”

Ms Soemino has put a neutral recommendation on Webjet stock, which she believes is expensive at present levels.

(Note that the ASIC figures apply only to Australia and do not take into account Zuji’s performance in Singapore and Hong Kong.)


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