City Insider: Tui buyout could come sooner than you think

City Insider - A City perspective on the travel industry from FT journalist David Stevenson

Is Tui Travel’s German owner ready to mount a takeover bid? A number of factors suggest this winter could be the perfect time

Over the last few months I’ve slowly been coming to the view that the stockmarket listing of both Tui Travel and Thomas Cook is something of an anachronism, that the public markets just don’t get their individual stories and that both might be about to depart the London market for good very, very soon.

Back in the summer I noted a groundswell of interest amongst the private equity crew to work out a deal that ‘takes out’ Thomas Cook. Given the right price – and the right amount of sensibly structured debt – it seems obvious to me that Thomas Cook’s shareholders would sell.

With Tui Travel I suspect we’re looking at a different road to the same destination. At what price does it make sense for the German parent group to buy out the remaining 48% of external shareholders? I suspect a series of developments over the last few months might be about to give us a clue as to the likely ‘exit’ price.

The first key development came with the announcement that container shipping unit Hapag-Lloyd has agreed a new refinancing plan. Tui owns 43% of this business and now that the cashflow lines are secure I’d imagine that creative minds in Tui Towers will be turning to working out how to sell this stake.

Tui reckons that it is “committed to maximizing the value of its Hapag-Lloyd investment and to closely monitoring all options to exit the business,” which is hardly a resounding vote of confidence.

Any money raised from selling this shareholding might be used for an alternative purpose – perhaps buying out those external shareholders in Tui Travel. The key for me is that Tui Travel seems to be at the right point in its reconstruction as a sexier, higher-margin growth business.

Granted business over the last few months hasn’t been stellar. Like everyone, Tui Travel can blame the ash cloud disruption and some major FX moves. But trading in the key Northern European markets and especially Germany and the Nordic countries has been very strong with double digit growth.

This weeks’ trading update reinforced that message with business trading “well” and “in line with recent guidance”. Trading for winter 2010/11 has also “further strengthened” with “differentiated” products selling well, as is the product range in the Nordics, code for Tui’s premium brands.

I also found Tui’s net debt position intriguing – it is paying its debt down faster than expected, which is terrifically good news for the parent group if it decides to launch a bid.

Back on the theme of premium holidays flying off the shelf, I’d also draw attention to the recent trading statement from Thomas Cook. Commenting on summer 2011, Cook observed that “early bookings are good, up 9%, and average selling prices are 4% ahead of last year. Over 50% of our bookings to date are for differentiated product concepts, supporting our strategy to further improve product mix, with customers responding particularly well to new formats in our Style brand and our family product range”.

So Thomas Cook’s premium business units and products are showing great promise for 2011. I’d argue that Tui Travel currently has an advantage in the premium brands space, and if Thomas Cook is doing well, Tui will probably be doing even better.

All of this conjecture reinforces my earlier point. Spring and summer 2010 might not have been fabulous seasons for the big two, but business is about to markedly improve, especially in premium family brands. If you’re going to buy out external shareholders wouldn’t it be better to make the purchase before your premium brand strategy has started to pay off?

The fly in the ointment at the moment is the price needed to convince outside shareholders to part with their shares. Talking to City analysts I’d suggest that the takeout price might need to be as high as 300p per share and 260p at an absolute minimum (valuing Tui Travel at £2.9bn).

The problem is Tui may not want to pay much more than the current 224p per share. Analysts expect earnings per share of around 20p to 22p in the coming year with a dividend of between 10.7p and 11p (the current market cap is about £2.5 billion). Even allowing for lower costs from delisting Tui Travel, I can’t quite see how the parent Tui group can get more than 25p in cash per share per annum in cash earnings.

Given current market conditions I’d suggest that a multiple of more than nine times cash earnings is probably the maximum I’d pay if I were Tui. If this was the case I’d suggest that there’d be no premium to the existing share price.

But the grim, dark winter that is fast approaching might bring an opportunity for Tui’s German parents. I’d lay my money on a nasty market fall in the next three to four months. I have a sense that we’ve not seen the last of the panic about sovereign default, and I’d also suggest that worries about a double dip recession and the onset of deflation have absolutely not abated.

In these circumstances I could see Tui Travel’s shares retreating below 200p as investors panic about consumer spending. Cue a takeover at between 240p to 260p as Tui group races to the rescue of beleaguered shareholders in uncertain markets. Game over for Tui Travel as an independently listed business.

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