TUI AG and TUI Travel have ended years of speculation and announced that they had reached an “agreement in principle” on the terms of an all-share, nil-premium merger.
The combined company will expand the core tourism business, but denied speculation that it would sell two TUI Travel divisions, including the online accommodation business, rumours which have raised concerns over the merger’s motivation.
Previous merger talks between the two collapsed at the beginning of 2013 after TUI AG said that it would not make an offer because “a share-based transaction at current exchange ratios is not in the interest of TUI shareholders”. Since then both companies have seen their share prices rise as cost-cutting and growth strategies have been implemented.
The two companies said that a merger would mean acceleration of the core mainstream tourism business, while non-core businesses would be run separately “and maximised for value”. A merger “would bring together the content portfolio of hotels and cruise ships of TUI AG with access to customers through the distribution capability and unique holiday concepts of TUI Travel”.
In a presentation to analysts TUI Travel CEO Peter Long said: “Non-core is non-synergistic. By grouping these businesses and supporting them gives us focus, it simplifies our business. What we are not alluding to at the moment is that we are going to sell them because we are not going to sell them, we are going to look at ways to create value.
“There are many ways which you can add value. At this point what we are saying is we have the merged core business which is integrated mainstream and we have some other very good businesses and we will be creating value.”
A merger proposal is not expected before mid-September. Under current plans, the merged company would have a dual listing on the London and German stock exchanges but would be domiciled in Germany.
TUI Travel includes online travel agent Laterooms.com and bed bank HotelBeds. As of TUI Travel’s full-year results, released in January, HotelBeds had an online database supplying over 60,000 hotels in 180 countries to travel agents, airlines and tour operators. Alongside Bedsonline, its other wholesale business, the group said it led the market in the B2B space.
TUI continues to expand its accommodation online travel agent brands, with LateRooms.com in the UK, AsiaRooms.com across Asia and in Brazil with MalaPronta, Brazil’s fourth largest accommodation-only OTA.
The group has also been working to compete with other OTAs. At TUI Travel’s first half results in May, the company said that online bookings accounted for 38% of sales, up from 34% in the first half of the previous year. Tablet and smartphone bookings rose by 81%. The company said that customers were increasingly seeing the benefits of its digital transformation strategy, which was driving conversion improvements from its new web platforms.
To push this, the group has hired Dan Robb, Google’s industry head of travel, as the first digital marketing director for its mainstream sector. Nick Longman, managing director of distribution and online for TUI’s mainstream sector, said: “Digital marketing is core to our digital and online modernisation strategy. It is therefore important that we have the very best people in the business to make sure we capitalise on the opportunities available to us”.
It has been more than three years since the company announced plans for its “digital transformation”, driven by the consumers’ move away from the high street travel agent towards online channels.
The two companies now hope that this digital transformation can be extended to encompass the merged group.
The pair have forecast potential cost savings of at least EUR45m pa and said that they expected growth to be enhanced by “broadening the portfolio of unique holiday experiences, increased occupancy levels in existing hotels, the future expansion of TUI AG’s core hotel and cruise activities and integrated yield management”.
The two companies must now convince their shareholders. Alexey Mordashov, the largest shareholder in TUI AG with over 25%, has indicated his support for the merger. Long, said: “There has always been a compelling logic to bringing our two businesses together. We’ve got to know our major shareholder TUI AG very well.”
TUI AG has 232 hotels, with the hotels division reporting revenues of EUR403m in 2013. Its mainstream tour operation business saw revenues of GBP12.87bn in 2013, while TUI Travel’s online accommodation business reported revenue of GBP2.1bn for the same year, while the specialist and activity division saw revenue of GBP1.4bn.
The companies said that the accelerated growth would see the RUI Hotels & Resorts brand expand from 100 hotels at the rate of three to five projects per year, while the 108-strong TUI Hotels & Resorts business would grow, adding a possibly 50 sites over three to five years.
Morgan Stanley analyst Jamie Rollo was quoted by the Financial Times describing the deal as “strategically questionable” for TUI Travel shareholders because it was merging with a weaker business that would be relying heavily on the UK company, adding: “This appears to us to be primarily a financially motivated deal.”
Rollo added that the sale of some non-core divisions could potentially lead to a GBP1bn return to shareholders “at some point”.
HA perspective [by Chris Bown]: It’s been a long time coming but finally the TUI merger could be happening. The combination of the distribution-oriented TUI Travel with its partner TUI AG and its portfolio of hotels and cruise ships makes sense, if you value vertical integration.
TUI Travel’s Peter Long argues those 232 hotels will be increasingly valuable in a competitive market. As tourists from emerging markets look for better quality travel experiences, competition for independent hotel bookings is hotting up: Long warned that 25% of rooms in the Maldives are now booked by Chinese companies.
However, the vertical integration model works less well for consumers resistant to a tied sales channel that will only offer them a limited choice. And one analyst wondered why TUI AG is not acting to target emerging market customers for its hotels, rather than opting to restrict itself to TUI Travel customers.
Apart from head office savings, what else can the industry expect to see? One option, once the two entities have combined, could be the disposal of non-core businesses – which might include the activity holidays business, and the online accommodation businesses. Laterooms, which has continued to invest to maintain high online visibility, would doubtless be one highly contested trophy.
[Andrew Sangster adds]: It is an interesting insight from Peter Long that he believes owning hotels will be critical in satisfying accommodation demand. In the oligopolistic world of tour operators, TUI, as the biggest player, has the ability to drive demand to its properties. This is not something that any hotel company does well.
What owning hotels gives TUI is control. It might be that other structures can also deliver this. But what matters is that TUI controls both the levers of demand and the fulfilment operation.
What traditional hoteliers have been bad at, and are getting worse at, is delivering demand to their properties. Anecdotally, some of the bigger brands are also gaining a reputation for not being focused enough on their fulfilment obligations as managers either. What then is their purpose in life?
In retail, the digital revolution has been led by Amazon, which has succeeded in both generating demand and in fulfilment. This company has succeeded by simultaneously delivering in the online and offline worlds, it has matched digital demand success with logistic prowess.
Can TUI emerge as an Amazon equivalent in accommodation and travel? Probably not with its current set-up. It is simply too small.
There is a fantastic speculative hare running right now that Priceline, the owner of the Booking.com brand and a company with a market cap of USD64bn, making it more than twice the size of the biggest hotelier, is interested in buying TUI.
Whether true or not, this speculation raises the spectre of an Amazon for the travel sector. And this should be giving hoteliers nightmares.