It’s not the easiest time to take a travel technology-themed company like Silicon Valley airfare consolidator Mondee public, especially via a merger with a special purpose acquisition company (or SPAC). All four 2022 travel SPAC-merger deals to go public identified by Skift have fallen since stocks began trading, by an average of 55 percent. Short-term rental company Sonder, which announced layoffs June 9, is off 86 percent.
So should Mondee, which arranges special deals for members of affinity groups and other travelers, expect to be different? And, to ask a harsher question, is there really much way to even know from the scanty disclosure in public filings preceding the deal?
The answers are, maybe and not easily. And that information gap would be a short-term problem even in a market where blue-chip technology stocks haven’t lost 28 percent of their value since winter. In this market, where they have, a deal launched on very narrow (if any) profit margins, a growth track record distorted by the Covid pandemic, and a mysterious split with one of its investment bankers isn’t likely to break records.
There are two issues with this deal. Whether Mondee overcomes them will teach valuable lessons to managers considering SPAC mergers of their own.
One is that Mondee doesn’t make much money. By some measures, it still loses some. It had net income of minus $7.76 million in the first quarter of 2022, and -$37.3 million in all of 2021, on revenue of $37.7 million and $93.2 million, respectively. The other is that the latest version of the prospectus explaining the merger to public investors, filed June 21, contains no clearly organized pre-2021 financial information at all, and no quarterly breakouts even for last year. That makes it hard to determine whether Mondee is gaining the financial momentum candidates for successful public stock debuts need.
In nearly any market, IPO investors want companies that are just turning profitable and about to turn very profitable indeed. To succeed after the offering, whether in a conventional IPO or a SPAC merger, the company should be growing rapidly heading into the deal. Its gains should be obvious every quarter. Its costs should also be growing notably more slowly than sales each quarter. And profit margins should move from negative to positive, promising a shift from narrowly when the deal is done to very profitable in quarters to come.
Is Mondee following it? That’s where you come to the second issue. The prospectus doesn’t quickly say what Mondee’s 2020 or 2019 sales or profits were, let alone give detailed cost information, because there’s no financial statement from any year before 2021. The document offers glimpses of the picture — you can figure most of it out — but that’s not how this is usually done. Companies normally explain their pre-IPO finances in a few clear tables, but mergers with SPACs play by different rules than conventional IPOs.
“We’re profitable, we’re growing, we were coming into the pandemic,” Mondee Chief Operating Officer Jim Dullum said in an interview published June 16. (Mondee didn’t respond to an interview request from Skift). “Coming out of the pandemic, we just announced our revenue is three times what it was (in the first quarter of) 2021, so we’re already back on that growth track. We hope to continue to be that bright spark in the SPAC market by continuing to outperform.”
This answers the first question, albeit in an unaudited way. Mondee lost $15.7 million in operating cash flow cash last year, and generated $3.42 million in cash in the first quarter, with $2.23 million of earnings before interest, taxes, depreciation and amortization. That’s not bad, but there’s not a lot on paper here to assure that these numbers will scale rapidly.
Indeed, notes sprinkled through the document suggest Mondee has work to do to justify its valuation. In its negotiations with ITHAX, the SPAC it is merging with, its equity valuation never got higher than $608 million, according to its own filings. Those were based on projections of EBITDA for 2023. Ther caveats: The 2023 projections may be conservative, and the valuation doesn’t count cash ITHAX will contribute to the deal.
But that’s not the only obvious risk to this deal. The prospectus says Mondee has renegotiated its bank debt six times during the Covid pandemic, deferring interest payments through June 30, when it plans to repay its loan. It also took more than $9 million in federal aid under the Paycheck Protection Program, which propped up companies hit by Covid. (Disclosure Note: Skift also took PPP money).
The most indecipherable risk is the disclosure that Deutsche Bank resigned on June 10 as the capital markets advisor to a financing related to the merger — and declined its $3.5 million fee — even though it had completed “substantially all” of the work to earn it, Mondee said.
“Such resignation may be an indication that by Deutsche Bank that it does not want to be associated with the disclosure in this proxy statement/prospectus or the underlying business,” Mondee said, explaining that Deutsche did little of the work of compiling the document.
Deutsche Bank spokesman Jon Laycock did not deliver a response to questions posed by Skift by publication time.
In a happier market, investors might overlook some of these challenges. All sorts of travel companies took government money in 2020 and are doing fine now. The rift with Deutsche Bank would have been explained in a pre-IPO roadshow, most likely.
In this market, Mondee will have to prove itself. It has to post growth-company like gains in sales and profits. It has to be consistent. And it has to do it in a market where economists and travel executives are debating whether the post-Covid surge in travel will continue once summer bookings made earlier this year work through the system — and whether there will be a recession.
It could work, since Mondee actually fits the profile of a newly cash-flow positive IPO company —based on limited information in the filing. And even if its stock does poorly at first, it will still have cash to acquire smaller companies, which has been its strategy for years. But investors in the deal likely won’t make much money until Mondee backs up its words with profits.
See Mondee’s Investor Deck, below.
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