In association with Travelport
Although the proposed merger of Tui Travel and parent Tui AG might cause some concerns about a shift in strategy it’s likely to be waved through with little opposition, says David Stevenson.
It’s been a busy few weeks for the travel industry’s leader, Tui Travel.
The summer season is about to kick off in earnest, business is looking robust and the all-important merger with German parent Tui AG has finally been announced.
On my part I’ve also managed to spend some quality time with the group’s chief information officer Mittu Sridhara.
Talking to Tui’s effusive technology guru, it’s clear that big changes are afoot in the world of the traditional package travel product. More on that in tomorrow’s second part of this month’s City Insider.
But first that entirely unsurprising nil premium merger deal between Tui AG and Tui Travel.
The deal basics are in a box below, but I think it’s fair to say that Peter Long and colleagues will have a tough time selling this to the rest of the shareholder base (Tui AG owns 52% of Tui Travel). It’s a sensible deal which is also very unexciting for everybody but Tui AG.
The first key factor for many investors is that we’ve been here before – and a deal fell apart then. Merger talks broke out in 2013 but collapsed because the price wasn’t right.
That prompted Peter Long to admit to the Financial Times that a merger wasn’t on the cards : “Bluntly, it won’t happen” he told the pink paper.
Apparently two key factors have changed his mind. The first is that Tui AG boss Friedrich Joussen has implemented a cost-cutting programme and advanced his plans for ‘cleaning’ up the group structure.
Also Tui AG’s largest shareholder, Alexey Mordashov ( he owns 25%), is firmly behind the deal.
For external shareholders all of this doesn’t really count for much though – it’s all about the share price and any prospects for post-merger growth.
On the price front some investors have been cheered by a note from analysts at Morgan Stanley which suggests that in fact UK shareholders could be £320 million better off under the terms of a proposed €7 billion merger – the implicit premium is said to be worth 48p a share.
This is based on the idea that although existing Tui Travel external shareholders own just under 50% of the shares, following the merge they’ll own ‘circa 45% of the enlarged company’, according to Morgan Stanley.
“While this is a 5% reduction in ownership, they are effectively swapping 5% of Tui Travel for 45% of all of the other Tui AG assets. Based on an undisturbed share price [of] 391p, this implies a total payment of £320 million, or 48p per share is being given up.”
Investors may or may not take that analysis at face value – I’m not sure they will actually – but they’ll definitely be concerned that there is no stated overt premium for the merger, removing a FTSE 100 company from their portfolios just as most investors expect the UK economy (and market) to outperform its European peers.
The merger also introduces a whole bunch of strategic challenges that most Tui Travel shareholders would rather not worry about – they’ve got used to the group’s methodical focus on improving the margin and the balance sheet via a focus on organic restructuring and growth.
Now they’ll have to worry about the combined group selling its 22% stake in shipping group Hapag Lloyd, as well as finding a new home for Tui Travel’s online accommodation operation and the specialist and activity business – all bar the shipping business are solidly profitable operations.
Investors might stop worrying as they think about all the capital this could free up – up to £1bn cash to shareholders “at some point” – but it’s a huge amount of operational uncertainty for investors used to not worrying about the future strategic direction of the firm.
And talking of direction, there’s also the not-so-trifling matter of the capital model, which will slowly be transformed from one that is asset lite (not many hotels) to asset heavy (lots of hotels and expensive cruise ships).
Again, these fears could be soothed by the potential for cost savings – the group estimates synergies could be worth about €45 million a year with tax benefits kicking in another €35 million – but the financial model is undoubtedly changing in a rather profound way.
Long may be right when he says that good quality travel content may be a necessity (ie. own your own premium hotels) but I’m not quite sure that many investors will see it that way.
On balance my suspicion is that the merger would probably get the go-ahead, if only because most fund managers aren’t terrifically keen to overrule an experienced board filled with well respected senior execs.
A few active fund managers might kick up a stink but most institutional managers will be happy to wave through the deal with one proviso: that nothing is done to hurt the all important dividend payout.
The Deal Basics
The combined group
- Tui AG already owns a near-55% stake in Tui Travel, as well as 232 hotels and a cruise business plus a 22% stake in shipping group Hapag-Lloyd
- Combined, the groups’ mainstream leisure tourism businesses would have annual revenues of £13.4 billion and earnings before interest and tax and amortisation (EBITDA) of £706 million
The deal
- Structured as a nil-premium merger worth about £4.4 billion
- Tui Travel investors will get 0.399 new Tui AG shares for each of their existing shares
- A firm merger offer will be made after mid-September, with closing expected by spring 2015 – final completion expected at the start of 2015.
- The combined group will be incorporated and headquartered in Germany, with the shares listed in London on the FTSE.
- Joussen and Long will act as joint chief executives of the merged group until February 2016, with Long to then become chairman and Joussen to continue as chief executive.