A dream merger comes unstuck: TCI, Thomas Cook call off talks

Y Siva Sankar in Bombay

It's not all over for the stillborn 'dream deal' of Thomas Cook India Limited and Travel Corporation (India) Limited. The two travel companies have not ruled out revival of talks to take the deal to its logical end.

"We have a good relationship. It could still be possible," said Jehangir Katgara, director of TCI and a nephew of Adi Katgara, director-founder of the company. Ashwini Kakkar, chief executive and managing director, Thomas Cook India, said: "We continue to maintain good relations with TCI. We will continue to work with them in the future."

The merger deal was in the making for years, and was expected to propel India's travel and tourism industry to a higher plane. Thomas Cook was expected to acquire TCI for over Rs 1.2 billion.

TCI has a team of 1,200 people at 27 offices in India and 12 abroad to cater to over 1,000 tour operators and agents. Thomas Cook India has 51 branches that service nearly 50,000 inbound travellers. Sixty per cent of its income comes from forex transactions. The combined profit of the merged entity, with 78 branches, was expected to double from Rs 500 million to Rs 1 billion in quick time.

Thomas Cook India has been focusing on forex, credit cards and financial services for long. By acquiring TCI, India's top player in inbound tourism, Thomas Cook sought to emerge as the largest travel and tour operator in a rapidly growing, post-liberalisation market.

India is being eyed increasingly by foreign travel majors such as America's Carlson group and Switzerland's Kuoni (which acquired SITA and SOTC in 1999).

However, on September 21, Thomas Cook and TCI issued a joint statement that "they have mutually agreed to discontinue negotiation/talks with regards to a possible merger/acquisition of their operations".

Ever since, the travel industry and mediapersons have been agog with speculation as to why the 'dream deal' came unstuck in the 'era of mergers'.

Both Thomas Cook and TCI are not saying much. Asked if Thomas Cook could not raise the money required (Rs 1.2 billion), Jehangir Katgara said, "No. Funding was a not a problem. We could not come to a mutual agreement "

However, industry observers said the deal failed because of financial complexity. A media report hinted at an all-cash deal. "With a balance sheet size of Rs 1.5 billion, the acquisition would definitely have required some financial manoeuvring by Thomas Cook," said an analyst.

There were also reports of an all-stock deal. The Rs 1.2 billion acquisition would have meant an equity dilution of around 34 per cent for Thomas Cook (average share price of Rs 400). "Such a dilution would have had an adverse impact on future earnings, valuations and, consequently, the stock price," the analyst said.

The deal envisaged that TCI and Thomas Cook would continue as two entities, only the operations would be merged, there would be no retrenchments and TCI would be board-managed -- in other words, the Katgaras would remain in the saddle.

Did that make it a badly structured deal? "No," said Jehangir Katgara. However, an industry observer remarked: "They have just backed off. There were several aspects on which there was no mutual agreement. But the deal is not totally off. This deal has been in the making for two years. It's not uncommon for deals to be called off even when they are on the verge of being sealed."

Agreed septuagenarian Adi Katgara, who is considered the Grand Daddy of Indian domestic tourism. "This was a complex deal. At times, such mergers and acquisitions do fall through," he said in the joint statement.

Media speculation hinted that other stakeholders of TCI, especially the Kotaks and the Parikhs, were not in favour of the deal. Adi Katgara told the Business Standard in August: "I agreed to sell because with large travel companies on the prowl buying up Indian agencies, we would have been reduced to small players. The Kotaks and Parikhs were averse to the idea of expansion, while I believe that if you are stagnant, you will die."

"Management control could have been a key point of contention between the two companies. I believe the Katgaras were not very keen on ceding management control," said Kaushal Shah, an analyst at LKP Securities in Bombay.

It is learnt that Thomas Cook India shareholders, too, perceived no gains other than strategic sense in the deal. The deal would have led to a payment or an equity dilution for Thomas Cook without any addition to revenues since both companies were to remain separate entities. "Investors do not look very kindly at financial outflows from a company that are not backed by a commensurate future inflow," said an analyst.

Kuoni Travel India, an observer of the goings-on in the travel segment, has its own understanding of mergers. Ranjit Malkani, Kuoni India's managing director and chief executive, said: "The formula for a merger is that the merging companies should have a product fit, price fit and a people fit. We believe that any or all of these factors could have been responsible for the fallout."

TCI would not comment on that. Nor would PricewaterhouseCoopers, the business and financial advisory firm that did the due diligence of TCI for Thomas Cook India. "First of all, we are not even supposed to reveal that we did the due diligence. Somehow, newspapers disclosed this. We are bound by the confidentiality clause of our agreement. I don't know why the deal fell through. The talks were held at the partner level," said Devean George, who worked on the deal. Bimal Khanna, partner, PricewaterhouseCoopers, was not available for comment.

But everyone agrees that a completed deal would have been mutually beneficial. "Yes, we complement and supplement each other," said Jehangir Katgara. Kuoni Travel India's Ranjit Malkani said: "The deal would definitely be beneficial to the travel market in terms of greater consolidation, greater scale players and professional management."

Thomas Cook India has recently decided to focus strategically on the travel business for augmenting future growth, in sync with its parent's new priorities, which include hiving off financial services into a separate outfit. Over the years, forex and related services have been its forte -- the travel business got a short shrift.

As a result, it missed the growth in the travel business in India. "A deal with TCI would have made sense as TCI is a highly recognised and popular name in the business. Additionally, it has a very good presence in India as well as outside India," said LKP analyst Kaushal Shah.

Now that the talks are off, other players are expected to flex their financial muscle and zero in on TCI. Jehangir Katgara himself does not rule out such a possibility. "Anything is possible in the future."

Kuoni had courted TCI in the past but stopped short of a deal. The company never hid its "mission" to be "India's greatest travel company" and to develop each market segment it chooses to operate in. Its strategies for growth include organised growth and acquisitions. "Any acquisition, which fits in with these objectives, could be a prospect for Kuoni India," said Ranjit Malkani.

The company is looking for mergers and acquisitions for SITA-Inbound Division in terms of specialised markets like adventure tourism, incentive tourism and convention tourism.

With foreign players on the prowl, TCI, which had explored options for a joint venture or a public issue, may be perceived as a target for takeover. But Jehangir Katgara dismisses such talk. TCI, he said, will continue to be the top player in the inbound tourism market and greatly increase its activities in the outbound market. "TCI will not only sustain itself but will go in for a quantum leap. We are not afraid of competition. Please remember one important fact -- TCI did not woo Thomas Cook and on no account were we desperate to sell. If another buyer comes along, we'll see."

Adi Katgara has been keen on foraying into e-commerce and launching a Rs 300-million 124-room resort in Kovalam, Kerala, (including 96 rooms on the land and others on houseboats), a Rs 300-million 150-room beach resort in Goa and a Rs 1-billion cruise ship. "We need a year to consolidate and within three years, we'll be well above our present levels of performance," he had said in August.

The number of foreign tourists to India is expected to touch 5 million by 2001, while the domestic tourists' number is projected to touch 90 million. The global annual earnings of the industry are estimated to be $7.2 trillion by 2005. India's share in world tourism is a meagre 0.4 per cent, but it is expected to touch 1-2 per cent by 2005.

The travel business in India is segmented into: a) leisure; b) business; c) inbound and domestic; and d) employment/migrant travel. Thanks to an upsurge in business travel in the post-liberalisation era, the Indian travel industry has attracted global majors' attention. Business travel has stabilised at a growth rate of 10-15 per cent per annum.

With increasing disposable incomes and lower costs, leisure travel -- both domestic and, to a larger extent, outbound travel -- is experiencing an upward trend at 30 per cent, according to industry sources.

Inbound travel is still fraught with infrastructural problems. "SITA Inbound is growing at 15 to 20 per cent per annum, which is the same as the steady growth rate of inbound travel," said Kuoni India's Ranjit Malkani.

However, pressured margins and slow growth in profitability have somewhat diluted the excitement. But travel operators are optimistic. "Prospects are encouraging, based on upward swing in individual outbound travel (17-20 per cent per year) and the development of new services and products," said Jehangir Katgara.

Agreed Malkani. "We believe that the tourism business is coming of age and a great amount of acquisitions and mergers are going to create professionalism and growth in the tourism industry."

The Internet is a factor, according to analyst Shah. "The travel scene in India is very competitive. Customers are very discerning and educated. Hence, better services have come into focus. Margins have come under some pressure and, with the spread of the Internet, are likely to head downward in the future. However, given the fact that the economy is on a sustained growth path, the prospects for both inbound and outbound travel appear to be very good."

EXTERNAL LINKS:

Travel Corporation of India

Thomas Cook India

Kuoni Travel India

An overview of travel and tourism industry in India and the world

Foreign investment in tourism industry in India

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