Corporate: Thomas Cook On A Tough Tour

RESTRUCTURING
Thomas Cook On A Tough Tour

Why the Katgara family sold Travel Corporation, and why Thomas Cook had little choice but to acquire it.

By Brian Carvalho

Transport Corporation (India) -TCI-is being bought over. Long live TCI. That could well sum up TCI Director Adi J. Katgara's emotions after the acquisition of this Rs 300-crore family business by Thomas Cook (India), which will fork out Rs 120 crore to acquire TCI lock, stock, and Katgara. The Katgara family will continue to operate this 40-year-old travel and tours company after the takeover. Due diligence is currently under way and the deal should be complete by September, 2000.

You'd expect the 70-year-old Katgara to get mushy and fondly reminisce about the past lineage and tradition of TCI. Not quite. For two reasons. One, the company no longer has to worry about competing in a cut-throat sector in which margins are thinning thanks to the arrival of global competition-on a turnover of Rs 300 crore, TCI's profits stood at just Rs 12 crore last year. Two, with the proceeds from the sale of TCI, Katgara can now bankroll investments in higher-growth areas like hotels and cruises. ''The future of the travel business is uncertain. Our survival was at stake,'' says Katgara.

Katgara couldn't have said it better. Over the past few months, the domestic travel and tourism sector has been shaken up by the arrival of the 3.5-billion Swiss franc Zurich-headquartered Kuoni Group, which has snapped up two domestic majors-sotc and Sita. The new entity, Kuoni India, now boasts total sales of close to Rs 500 crore. Ranjit Malkani, 50, Managing Director & CEO, Kuoni India, points out that Kuoni is the ''largest leader of tourists into India, which was earlier TCI's core business. Kuoni's arrival has made a 30-40 per cent dent in TCI's revenues.'' Then, the Carlson group of the US has made a move on another local player In Travels. And, if industry sources are to be believed, expect another burst of M&A in the months ahead. The possible targets? Cox & Kings, Raj Travels, Mercury Travels, and the Welcomgroup's travel business.

Suggest to Cox & Kings Director Peter Kerkar that his company is on the hit-list of predators, and he'll dismiss the idea as ludicrous. ''I have the best brandname in the business. So, neither do we need acquisitions nor are we under threat of one,'' says Kerkar, 35. Indeed, sources at Kuoni India reveal that before taking over Sita, Kuoni had tried to woo Cox & Kings, but Kerkar wasn't interested.

On The Rebound

Ironically, around the same time, Thomas Cook was trying to get into bed with SOTC, but was pipped at the bedpost by Kuoni. And, after Kuoni gobbled up Sita too, Thomas Cook had little choice but to step up its efforts for TCI, which, according to Katgara, is the leader in the ''genuine inbound tourist'' segment, with a 10 per cent share. Katgara adds that Thomas Cook has been negotiating with TCI for about two years, in which time the Katgaras have evaluated all the possibilities. ''We thought of going public, but then we realised that we would still be fighting without the financial muscle of a partner,'' says Adi Katgara.

You can bet, though, that the acquisition of TCI will test Thomas Cook's muscle. Company officials weren't available for comment. However, it's evident that Thomas Cook, too, is feeling the heat. ''Margins are under pressure both in the travel and financial services businesses,'' points out Kaushal Shah, 28, Research Analyst, LKP Securities. Indeed, net sales last year (the company has a January-December financial year) slipped marginally to Rs 71 crore from Rs 72 crore the previous year, and profits were virtually stagnant at Rs 18 crore (Rs 17.2 crore in 1998).

Besides, Thomas Cook (India)'s fortunes could be decided by the restructuring that happens to its worldwide operations. The Preussag Group-Europe's largest tourism company-has taken a controlling interest in Thomas Cook Holdings of the UK. Preussag is tipped to be keen to hive off Thomas Cook's financial services business into a separate company. It may be even sold, as Preussag is keen on buying into another biggie-the $1.8-billion Thomson, the largest tourism firm in the UK.

If Thomas Cook (India) loses its financial services division, which had brought in two-thirds of the company's revenues last year, it will be left with precious little. In that context, the acquisition of TCI-the largest travel and tours company in the country-makes plenty of sense, as at one stroke Thomas Cook (India) becomes a Rs 300 crore-plus company (excluding financial services).

Funding Pressures

You can't help wondering, though, how Thomas Cook Managing Director Ashwini Kakkar is going to raise the Rs 120 crore that is needed to fund the acquisition. It's not impossible, but it won't be easy either. True, as of last year Thomas Cook had reserves of Rs 73 crore. But if the company resorts to borrowings to fund the rest, the balance sheet debt will soar. Over the past three years, Thomas Cook's debt has been steadily increasing, (from Rs 35 crore in 1997, to Rs 65 crore last year). Kakkar can go in for an equity dilution, but that will hurt the company's earnings per share, which anyway has been static at around Rs 20 for the last two years.

Indeed, there will be further funding pressures. Thomas Cook has major e-Commerce plans, and it is also planning to set up two resorts in Goa and Kovalam (Kerala) and buy a cruise-ship. Both these will be joint ventures with TCI. Each resort calls for an investment of Rs 30 crore, and the cruise-ship would need another Rs 100 crore. The Katgaras will fund these ventures from the proceeds of the acquisition, even as they turn their attention to another group company, the 100-year-old cargo forwarding firm, Jeena & Co. Thomas Cook, meantime, will have its hands full financing the acquisition and the joint ventures.

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