TUI AG is considering an offer for the Central European tourism operations of its TUI Travel Plc (TT/) unit as the owner of Europe’s largest tour operator seeks to more closely integrate the two companies without making a full takeover, according to two people familiar with the talks.
TUI AG would fold TUI Travel’s business in the region with the parent company’s hotel and cruise ship operations, said the people, who asked not to be identified because the discussions are private. The board prefers acquiring the parts of TUI Travel, which include Germany, Austria, Switzerland and Poland, over buying the 44 percent in TUI Travel it doesn’t already own as it would be cheaper, avoid funding risks and job cuts, they said.
TUI Travel shares jumped as much as 5.8 percent to 210 pence in London trading, the biggest intraday gain since January. They traded 2.9 percent higher at 204.30 pence as of 3:55 p.m. TUI shares advanced as much as 2.7 percent to 5.55 euros in Frankfurt.
TUI Chief Executive Officer Michael Frenzel, who is stepping down in February, has been trying to focus the company on tourism by putting units such as shipping up for sale. The German company is under pressure from shareholders including Russian billionaire Alexey Mordashov to change its structure after TUI AG (TUI1)’s market value fell to less than half of TUI Travel’s, according to Morgan Stanley analysts.
“The structure between TUI AG and TUI Travel looks unsustainable and a change appears increasingly likely over the next 12 months,” Morgan Stanley analysts including Jamie Rollo wrote in a Aug. 10 report. TUI AG buying parts of TUI Travel is an “achievable compromise with gains for both parties.”
Officials for both companies declined to comment. The Central European operations had 4.8 billion euros in sales in 2011, or a third of TUI Travel’s total, and an estimated 120 million euros in earnings before interest, taxes, depreciation and amortization, according to the analysts.
A full offer for TUI Travel hasn’t been ruled out, the people said. A final decision on an offer for the Central European operations won’t be made before incoming CEO Friedrich Joussen joins the board in October, they added. TUI’s preferred option of buying parts of TUI Travel may hinge on getting the support of Mordashov, the parent company’s biggest shareholder with 25 percent, and Norwegian billionaire John Fredriksen, who holds about 15 percent, as well as Joussen, said the people.
TUI AG shares gained 15 percent in the year through Aug. 10, valuing the company at about 1.36 billion euros ($1.68 billion). Shares of TUI Travel rose 21 percent in the period, valuing the company at 2.22 billion British pounds ($3.48 billion).
The parent company, which has more than 1.2 billion euros in cash, could use the money to acquire TUI Travel assets and pay down debt as well as potentially contribute to dividends, the people said.
While most investors would envisage TUI AG buying out the remaining shareholders in TUI Travel, it would be the “most complex” transaction because the parent company would have to issue undervalued shares and it would trigger refinancing needs in “completely unfavourable” capital markets, the Morgan Stanley analysts wrote. A reverse takeover could also face refinancing difficulties and opposition from TUI AG employee representatives, the analysts said.
TUI Travel was formed in 2007 when TUI combined its travel unit with First Choice Holidays Plc to ward off competition from Web travel agents and budget airlines. TUI Travel could use the cash from selling assets to TUI AG to invest in online and emerging-market travel, the Morgan Stanley analysts said.
TUI AG postponed a planned initial public offering for shipping unit Hapag-Lloyd last year because of turmoil in global equity markets. It has instead sold a 17.4 percent stake to investor group Albert Ballin for 475 million euros, and has retained the right to sell its remaining 22 percent holding in an IPO.