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Canada-based billionaire Prem Watsa-owned Thomas Cook India and Chennai-based resort company Sterling Holiday Resorts have announced a merger in a cash and stock deal that values Sterling at Rs 870 crore.
According to an announcement by Thomas Cook Managing Director Madhavan Menon here on Saturday, the company will first make a preferential allotment investment of Rs 187 crore at Rs 90.49 a share (a 2.7 per cent discount to Sterling’s Friday closing price of Rs 92.90) in Sterling Holiday, giving it around 23 per cent stake in the company. Thomas Cook will then buy shares worth Rs 176 crore from Sterling’s existing shareholders — Bay Capital, investors Sidharth Shankar, Dhanalaxmi S and Rakesh Jhunjhunwala — at Rs 98 a share. In the third stage, Thomas Cook will make an open offer for buying up to 26 per cent in Sterling Holiday for Rs 230 crore.
The share swap ratio for the merger has been fixed at 120 shares of Thomas Cook for every 100 shares of Sterling Holiday.
“This is a win-win deal for both of us. Thomas Cook will be able to sell Sterling resorts to its own customers. We will have one more service to offer to our customers,” Menon said. Both companies jointly will have a market value of Rs 3,000 crore, with 9,000 employees.
“With the cash infusion, Sterling Holiday will be able to ramp up the number of resorts and renovate the existing ones. The investment will also improve Sterling’s brand profile and increase customer confidence,” said Sterling Holiday Managing Director Ramesh Ramanathan.
The companies said the merger would be concluded by 2014 year-end subject to regulatory approvals.
After the merger, Sterling will continue operations under Ramanathan with an independent board as a separate subsidiary in accordance with Watsa’s philosophy.
Industry analysts say the deal throws a lifeline to Sterling.
Its competitor, Mahindra Holiday Resorts, is the leader in the resort space with more than double the number of memberships and properties than Sterling. It is also adding members faster than Sterling.
Competition is growing in the field with the entry of new players such as Magic Holidays and Cirtus Check Inn, which are expanding their presence with investments in properties in India and tie-ups with global chains.
Analysts say an increase in vacation ownership will depend upon the prevailing economic climate. “Membership growth has been sluggish and that is because of the current financial climate. A person will invest a few lakh rupees in time-share holidays and vacation ownership if he has surplus cash. You see auto sales falling and the property market not moving. These factors have an impact on the resort business," says an industry insider.
Sterling Holiday went through trying times with high debt till Bay Capital took it over in 2009. Bay Capital Investment's Siddharth Mehta took over as chairman of Sterling Holiday and brought in Ramanathan from Mahindra Holiday Resorts to run the company.
Since then, the company has been making a return of sorts by refurbishing its resorts. It has increased occupancy levels to 52 per cent from a lowest of 16 per cent a few years back. The company has 70,000 members and gets half of its business from non-member customers.
The second round of investment came in 2011 when stock investor Rakesh Jhunjhunwala and Radhakrishnan Damani each took seven per cent stake. The two rounds of equity infusion helped the company repay debt and renovate existing properties.
| Who is Prem Watsa? |
| Born in Hyderabad, the 63-year old has been the chairman and chief executive officer of Fairfax Financial Holdings since 1985 and was in the news after he bought Research In Motion, the maker of Blackberry phones, through a $4.7-billion deal. An IIT Chennai graduate, Watsa completed his MBA degree from Richard Ivey School of Business in Canada and is known as the Buffett of Canada. After working for a few years, Watsa had set up Fairfax Financial Holdings, which churned out $8 billion in revenue in 2013. An investor who prefers to keep a low profile, he gives a lot of power to boards of directors and CEOs to run companies. All eyes are now on Watsa as to how he will make money from Blackberry, which has not found favour with customers as well as other bidders lately. |
A comparison of Sterling Holiday Resorts and Mahindra Holiday Resorts
| Sterling Holiday Resorts has a base of around 67,000 active vacation ownership members | Mahindra Holiday Resorts has a base of 1.60 lakh vacation ownership members |
| Network of 19 full-service resorts with an inventory of 1,477 apartments. | Network for 44 resorts including two international properties in Bangkok and Dubai and total room inventory of 2,480 units |
| Added 3,409 new vacation ownership members in FY13 | It added 17,489 members in FY 2013 |
| Net loss reduced to Rs 20 cr in FY 2013 from Rs 40 crore. | Net profit for FY 2013 was Rs 106 crore up 2.2 percent |
