• Proceeds to be used to cut debt, fund new hotels, cruise ships
  • Buyers pay 1.2 times revenue for travel-industry booking unit

TUI AG agreed to sell its Hotelbeds online-reservations unit to funds of buyout firm Cinven Ltd. and the Canada Pension Plan Investment Board for 1.19 billion euros ($1.3 billion) as Europe’s largest travel services company seeks resources to reduce debt and fund expansion.

TUI will use proceeds from the disposal to raise its credit rating by “a few notches,” acquire assets such as tour operators, hotels and cruise ships, and invest in information technology, Chief Executive Officer Fritz Joussen said in a phone interview Thursday. The deal is targeted for completion by the end of September, the Hanover, Germany-based company said in a statement. TUI said a week ago that it was in talks with Transat AT about possibly acquiring the Canadian competitor’s French tour-operating arm.

Joussen is cutting back online activities to focus on filling TUI’s hotels and ships through links to its tour business to generate annual underlying operating-profit growth of at least 10 percent in the next three years. TUI is adding 60 hotels, compared with 320 operated currently, and plans on one cruise ship joining its fleet yearly through 2019 under a strategy outlined last May.

“The Hotelbeds price is better than what we anticipated,” as analysts had valued the unit at between 700 million euros and 1 billion euros, Joussen said. Interest in the unit was high, with more than 50 prospective bidders taking part in the first screening process, he said.

TUI shares fell 1 pence 1,024 pence in London trading Thursday, valuing the company at about 6 billion pounds ($8.76 billion). Moody’s Investor Service rates TUI’s long-term debt at Ba2, two steps below investment grade, while Standard & Poor’s gives it a BB- rating, three steps below.

Hotelbeds offers rooms to online and traditional travel agencies and airlines, providing a database of beds at more than 72,000 hotels worldwide. Cinven and Canada Pension are paying about 1.2 times 2015 revenue for Hotelbeds, which had underlying operating profit of 69 million euros last year, TUI said.

Lazard Ltd., Morgan Stanley, HSBC Holdings Plc and PricewaterhouseCoopers LLP acted as financial advisers to Cinven and Canada Pension. Deutsche Bank AG and Bank of America Corp. advised TUI.

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