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New York private equity giant General Atlantic has paid more than $1-billion for a majority stake in Plusgrade Inc., one of two Montreal digital companies that are cashing in on the growing trend by travel companies to generate extra revenues beyond selling seats and accommodations.

General Atlantic, or GA, bought out Quebec private equity firm Novacap’s minority stake in Plusgrade, as well as shares owned by the Caisse de dépôt et placement du Québec and other investors. The deal, announced Monday, gives GA a stake of more than 50 per cent in the 15-year-old company.

The purchase values Plusgrade above $2-billion – more than twice its estimated value from when Novacap bought its stake in 2021 from earlier investor TA Associates for upward of US$185-million. Former Air Canada chief executive officer Calin Rovinescu is also a Plusgrade investor and board member.

Plusgrade partners with airlines, passenger rail and cruise ship operators, offering a digital platform that enables travellers to buy or bid on seat or cabin upgrades, to buy empty seats next to them, or to access priority check-in, boarding and expedited security checks while in transit. Customers can also pay for hotel perks such as early check-ins, late checkouts and extended stays, while hotels can upsell them with personalized offers for spa visits and dinner reservations. Plusgrade splits the revenues with its partners.

The company also offers an online loyalty management program to travel and accommodation providers and card issuers, which it picked up in its US$385-million purchase of publicly traded Inc. two years ago. The platform facilitates the gifting, sale and transfer of points between programs to encourage redemptions. Increased program use translates into greater revenues and lower liability costs for its partners.

These so-called “ancillary” revenues represent a growing business for travel providers beyond selling fares and rooms, and include such features sold to travellers as checked bags, extra legroom, preferred seating, early boarding and priority screening. Ancillary revenues now make up close to 15 per cent of total global travel revenues, up from 6.7 per cent 10 years ago, and were estimated to reach US$117.9-billion last year, more than the previous high of US$109.5-billion in the prepandemic year of 2019, according to a global survey by car rental company CarTrawler.

The Caisse is also an investor in another Montreal company that has likewise prospered selling travel extras: Hopper Inc. The online travel agency, valued at more than US$5-billion, offers a range of add-on insurance-like products for travellers, including a flight-departure time guarantee, the right to cancel a flight or shift travel dates for no penalty and the right to freeze a price before booking.

Tanzeen Syed, GA’s managing director and head of consumer, internet and technology, said Plusgrade had emerged as a leader in the “macro trend toward ancillary revenues and loyalty, which are two big drivers of profitability for participants in the travel supply chain. They’ve done so in an incredibly software-driven manner that brings a lot of value” to its 200-plus customers and partners. GA has also backed several online travel companies globally including Airbnb and

Plusgrade is also benefiting from the travel industry’s continued rebound from the pandemic, and CEO and founder Ken Harris said he expects demand to stay high.

“I think we’re well past ‘revenge travel,’ and there’s been a structural change in the industry,” as people “prioritize travel and the experiences that come with it,” he said in an interview. “We’re in a new normal now of tremendous demand.”

Plusgrade and Points were hit hard by the pandemic as global travel plummeted, but soon recovered. Plusgrade was profitable, growing fast and generating about US$50-million in revenue annually heading into the pandemic. The Caisse had recently invested US$200-million, valuing it at US$600-million. Plusgrade’s 2020 revenue dropped by more than 90 per cent, but it weathered the bleakest period with few layoffs owing to a strong balance sheet and other cost-cutting measures. By 2022, it was exceeding prepandemic levels.

Points, meanwhile, was profitable 10 out of the 11 prepandemic years, as annual net revenues nearly quadrupled over that period to US$64.5-million in 2019. That fell by nearly half in 2020 but rebounded to US$50.8-million in 2021. Points revenues reached a record US$18.7-million in the first quarter of 2022, as it returned to profitability just before to the sale to Plusgrade.

Financing for the Plusgrade deal came partly from a US$420-million, seven-year term loan which earned the company a subprime credit of “B2″ from ratings agency Moody’s Investors Service and “B” from S&P Global Ratings. The agencies said the ratings reflected Plusgrade’s relatively small size – with net annual revenue below US$300-million – high debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) leverage of between five and 5.5 times, and high concentration with a few big customers in the volatile, cyclical airline sector.

However, both assigned Plusgrade a “stable” outlook given its profitability, positive free cash flow, expected revenue growth and liquidity, backstopped by an undrawn US$80-million credit line. Plusgrade is in relatively solid shape compared to other digital companies, according to a key industry metric known as the “Rule of 40.” Software companies are considered elite performers if their operating profit margin plus revenue growth rate add up to 40. At Plusgrade, those add up to more than 70, Mr. Harris said.

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