At first glance, Holidaybreak and Cox & Kings make an odd couple. They are strong, independent companies in their own right, but who would have predicted a marriage before news of their love interest this week?
Holidaybreak is a specialist in school trips, short breaks and camping and caravans in the UK and on the Continent. It is headquartered in Cheshire.
Cox & Kings deals in luxury long-haul travel, is headquartered in Mumbai and has offices worldwide. Imagine Noel Coward with Gracie Fields.
Yet the tie-up is not crazy. The document outlining the offer explains: “Through expansion into adjacent business areas, Cox & Kings seeks to maximise its service offering to an enlarged customer base.
“The combination will provide Holidaybreak with a platform to expand internationally by offering the company’s products to Cox & Kings customers in India, the rest of Asia and Oceania … Holidaybreak’s education business will capitalise on the latent demand for European education programmes and facilities fast emerging in India.”
In an odd phrase, the document points out: “In these new geographies the peak periods for outbound travel coincide with the European off-peak travel season and as a result the seasonality of Holidaybreak’s businesses will be reduced.”
It notes: “The acquisition represents a transformational step for Cox & Kings, providing scale and critical mass in key international regions. The complementary nature of the two businesses will diversify Cox & Kings’ revenue streams.”
The India connection
The key to the deal is India – its rapidly advancing economy, booming outbound travel market and English-speaking population’s thirst for education.
The companies are close in size, although Holidaybreak is bigger, yet it is a straight cash acquisition. Cox & Kings had a market capitalisation of £373 million at the start of this week. Its assets were valued at £285 million at the end of March when the company reported an operating income of £69 million and pre-tax profit of £27 million. It is not Tui Travel.
Holidaybreak reported revenue of £461 million in the year to last September and a pre-tax profit of £26 million. The Cox & Kings offer, embraced by the Holidaybreak board, values the group at £312 million.
This is a deal about Indian money – Mumbai market investors buying into the UK. It is Mittal taking over Corus. In a tabloid paper it might be headlined ‘The Empire strikes back’.
Debt and regulation
Two points are of interest. First, given the cigarette-paper difference in size between the companies, the deal is of necessity financed by borrowing.
Cox & Kings, or rather its subsidiary Prometheon Holdings (UK) Ltd – referred to in the offer document as Bidco – will finance the takeover with two letters of credit: one for £200 million and one for £121 million. The company has standby letters of credit for somewhat more, provided by Axis Bank of India.
The deal will leave Cox & Kings with quite a debt – although not as first appears both the £321 million (or £331 million with the full standby facility) as well as the £140 million of debt on Holidaybreak’s books at the end of March. The latter has been accounted for in the new credit facility. That debt is not small for a company reporting an annual profit of £27 million, swelled by the £26 million a year brought by Holidaybreak, but it is manageable.
Second, the Cox & Kings offer is clear on what would break the deal: a regulatory hold up. The offer document states the deal is conditional on “it being established … that neither the Office of Fair Trading nor the Secretary of State intends to refer the proposed acquisition … to the Competition Commission … [and] that no request had been made to the European Commission by the competent authorities.”
This is going to be no re-run of Thomas Cook and The Co-operative Travel. But why should it? The deal could complete before the end of September.