Patient players triumph in travel industry takeovers

Travel operators are consolidating methodically, as demonstrated by Thomson’s decision to turn down C&N Touristic’s offer in favour of Preussag’s.

There is something rather pleasing about a takeover bid by Europe’s largest travel operator for the UK’s biggest equivalent business, just as the holiday season approaches. It’s similar to a bid for Rowntree Nestlé ahead of Easter or ice-cream wars in August.

Indeed, much of the attraction of German conglomerate Preussag’s agreed £1.8bn offer for Thomson Travel has to do with timing. First of all, there is the skilful way in which Preussag let compatriot travel concern C&N Touristic’s offers play themselves out, before coming in with its knock-out blow.

There was good corporate brinkmanship here on the part of Preussag. C&N’s first indicative price for Thomson was 130p per share; eventually it raised the ante to 160p and stuck there, which was exactly the moment for Preussag to enter with its 180p bid. If Preussag had played its hand earlier, the whole matter might have turned into a grubbier and more uncertain kind of game.

But the most exquisite piece of timing must belong to Thomson’s relatively new chief executive Charles Gurassa, formerly of British Airways and consequently no stranger to how quickly shareholder sentiment can turn against travel industry bosses. He need only consider the recent experience of ousted BA chief Bob Ayling.

As it is, Gurassa can bask in the appreciation, even gratitude, of formerly beleaguered Thomson shareholders. Thomson’s shares hit 200p in 1998, so Gurassa hasn’t got original shareholders their money back. But the shares fell as low as 69p last February and there were few then that would have backed Gurassa to recover the price to the 170p level of Thomson’s 1998 flotation.

With Preussag, he’s done considerably better than that. And there were, presumably, not a few value investors who were buying early this year at slump prices well below the £1 mark. Gurassa must have been tempted to press his board for a recommendation for a “good” price of, say, 155p per share. His job wouldn’t have survived had he let such a deal slip away, so keeping his options open until Preussag dealt must count as a triumph of negotiating nerve.

Such patience, when the urge to cash in must be well nigh irresistible in such a competitive market, is very much a virtue in the travel business. This time last year, First Choice Holidays was widely being pressed into a merger with Kuoni of Switzerland. Airtours had a superior offer on the table – at an implied value well over 200p – but shareholders were led to believe, correctly as it turned out, that Airtours would be blocked by the European Commission on competition grounds.

First Choice’s shareholders gambled that the EC would be lenient. They were wrong. Kuoni’s offer lapsed, Airtours was blocked and First Choice’s share price went into free-fall. At the time of writing, First Choice’s shares were rising through the 153p mark – still way off the days of last summer, but heading in the right direction, as the Thomson deal gives a spur to industry consolidation.

First Choice is blessed with a management team which, like Gurassa, can hold its nerve. Last year, it became the most profitable UK operator, behind Airtours, boasting margins of 5.6 per cent, against an industry average of four per cent. Quite a turnaround from its darkest days as the industry’s dog of four years ago.

Now, First Choice is tipped as a possible target for the jilted C&N and, with the range of opportunities narrowing, First Choice’s shareholders could see some real value return to its rating. An alternative scenario sees First Choice as a potential partner for Thomas Cook, the UK’s third largest operator, in which Preussag will inherit a controlling stake as and when its offer for Thomson goes through. Preussag has indicated that it will spin off its Thomas Cook interest to appease competition regulators.

The overriding lesson of these deals, actual and prospective, is that fools rush in where longer-term investors fear to tread. There were fast bucks to be made for Thomson with C&N and, last year, in a quick fire-sale of First Choice to Kuoni. What we are witnessing now is industry consolidation playing itself out in its own good time. The result is better deals, with better commercial logic and the prospect of sustained earnings growth for investors.

There may be further patience to be called for, as European regulators have yet to rule on the prospects for Thomson with Preussag and the destiny of Thomas Cook. Having come through so much to date, the industry will have to steel itself for some further interventions.

But there is one final aspect to the travel industry’s patient endurance over recent months. Dot-com entrepreneurs and their online groupies were last year confidently predicting a rout of the travel industry by new technology. The industry has responded by developing its own Internet strategies and BA, through its alliance with 11 other European airlines, Airtours and First Choice have made it clear that they are not releasing inventory capacity to the likes of

With Lastminute’s share quote withering on the dot-com vine, what’s happening in the travel industry is a paradigm for “clicks-and-mortar” development of substantial Internet strategies in established industries. Again, that represents patience rewarded.

George Pitcher is a partner of issue management consultancy Luther Pendragon

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