In association with Travelport
David Stevenson considers the pros and cons of Tui Travel’s merger with majority shareholder Tui AG, and looks at the big two’s latest figures
For an opinionated observer of all matters business and financial related, October and November are crucial months.
Over these eight weeks we begin to see the tenor and tone of how the New Year will shape up.
This period is especially important for the travel sector. As always, the market will expect to be updated about half-year trading numbers from the summer.
We should also see the likely direction of the global economy in 2015 – an important narrative to which I will turn in a subsequent article.
But it’s worth dwelling on the Tui Travel/Tui AG merger which will be much the biggest travel story of the year.
If the deal goes ahead, the no-premium combination will be worth £5.2 billion.
Tui Travel shareholders will receive 0.399 new Tui AG shares for each share, which amounts to giving them 46 per cent of the combined group.
Tui AG will hold 54% of the combined group. The new company will be listed on the London Stock Exchange, with a secondary quotation on Germany’s market.
The small challenge is that although Alexei Mordashov – the Russian billionaire who is also Tui AG’s largest shareholder with a 25% stake – is behind the deal, I still don’t detect much enthusiasm for it.
Management love to talk about the synergies on offer which could amount to as much €80 million a year.
The Financial Times reports on a hidden discount within the offer. Apparently, Tui AG shares are worth 20% more than their market price, currently €11.10.
As a further sweetener, investors in Tui Travel, whose shares are worth £3.70 each, will get a 20.5p “second interim dividend”.
The investors I talk to aren’t quite convinced. Tui AG has traditionally had a more volatile share-trading history and its P&L [profit and loss] record is fairly volatile.
In effect, the UK shareholders are being asked to trade certainty for uncertainty.
Also, if I am being horribly honest I would say cross-border mergers don’t have a terrific record.
Anyone who has read about the travails of oil giant Royal Dutch Shell would know how rapidly these mergers can degenerate into bureaucratic nightmares.
My sense is that eventually one nationality ends up running the show and my money would be on the Germans being the dominant partners.
That may or may not be desirable, and my sense is that investors will take a great deal of convincing – although the merger will probably sneak through in the end.
In the meantime, we’ve had Tui Travel release its numbers for the past few months.
The good news is that there were no surprises ahead of the merger, with targets hit in both the UK and Germany where, according to the company “most of our programmes are now almost fully sold“.
Tui seems confident of achieving growth in full-year underlying operating profit of at least 9% on a constant currency basis, against guidance of between 7% and 10%.
Its UK yield performance is up, its winter 2014-15 programme is 38% sold and it reported “an encouraging start to summer 2015 trading” with UK bookings up by 11%. Yet again mainstream sales dominated, up 9% at 37% of all holidays sold.
There is a not dissimilar story at Thomas Cook which brought out its numbers in mid-September.
According to Cook, the group’s “FY14 underlying EBIT is expected to be between £315 million and £335 million, equivalent to growth of between 39% and 48%”, helped by strong late summer 2014 bookings as well as a robust web performance.
Tablet and mobile sales are growing, with the group expecting online penetration to “accelerate from the current level of 38%, as we continue our journey towards achieving more than 50% in FY15”.
The other encouraging stat related to Thomas Cook’s concept hotels – its ‘exclusive hotel’ brands – where demand was “strong” especially in the UK, with summer bookings up 43%.
And of course, chugging away in the background is the group’s jargon-heavy restructuring programme, with Waves 1 and 2 apparently ahead of schedule and delivering more “cost out and profit improvement benefits”.
If we step back from this blizzard of numbers, waves and targets we see that both Tui and Thomas Cook are in relatively decent shape.
Thomas Cook has pulled off a brilliant escape. Now it has to prove that its transformation will deliver a genuine product revolution based on the concept hotels.
Tui Travel has to convince any shareholders with concerns that handing the Germans the keys to the kingdom is worth the risk.
Don’t miss tomorrow’s Travel Weekly Business:am, when David Stevenson will outline the consensus view of the financial community on the outlook for the economy.