THL counts on campervan merger
TIM HUNTERTIM HUNTER
Opinion & Analysis
Since this article was written, Tourism Holdings has clarified details in its merger presentation of September 3. Where that document referred to estimated campervan numbers rising 5 per cent to 11,539 units in 2011, the company has clarified that those figures were for the total campervan market and its estimate of the rental campervan fleet was 5,480 units in 2009 increasing by 5 per cent to 5,770 units in 2011.
If you can't beat them, join them. It's one of the oldest strategies in the book and has the testimonials to prove it.
"A thrilling success" - James VI, Scotland. "Not bad" - Hone Heke, New Zealand. "Seemed like a good idea at the time" - Vidkun Quisling, Norway.
Okay, so results have been mixed, but in the corporate world scarcely a day goes by without companies mulling the pros and cons of merging with competitors. For those in the campervan business it's obviously become an urgent matter, hence the announcement from Tourism Holdings on Tuesday.
The idea is for two campervan companies, Kea and United, to throw in their lot with Tourism Holdings, owner of several campervan operations including Maui and Britz.
A presentation from THL gave a straightforward reason for the merger.
Total spending by foreign tourists fell 7 per cent from $6.2 billion in 2009 to $5.8b in 2011, while spending by tourists who like to rent campervans fell 11 per cent. Over the same period the estimated number of campervans to rent grew 5 per cent to 11,539.
Clearly, excess capacity is an issue, but if you're a campervan operator it may not be a good idea to unilaterally trim your vehicle fleet - that could just hand market share to competitors. It's a classic dilemma. Everyone would be better off if everyone cuts capacity, but each individual would be better off if everyone cut capacity except them. So the industry sits there playing a game of chicken, watching margins ebb away as they wait for rivals to cut first. Industry consolidation solves the problem, although it throws up the tricky detail of how to lubricate the passage of those being absorbed for the greater good - that is, no-one wants to take one for the team.
THL shareholders will therefore be concerned to ensure they don't give too much away in acquiring Kea and United.
However, a useful aspect of the deal is that THL is acquiring assets rather than companies, so it should be more obvious what it's getting for its money. The assets include about 1000 vehicles and rental locations in Auckland and Christchurch.
In exchange, THL is offering $69.5 million.
Of that, $50.9m is assumed debt - new borrowing by THL pays back old borrowing by Kea and United. The rest comprises 12 million new THL shares, $3.2 million in cash and a further $8m conditional on the vehicles being worth what what everyone thinks they're worth.
Is that fair? To help shareholders decide, THL has asked merchant bank Cameron Partners to analyse the deal and report back this month.
One potential variable is the shares - THL has offered them on the assumption they are worth 61.9c each, or $7.4m in total, providing a stake of 10.9 per cent in the enlarged company.
That's not out of whack with the market, although it's a few cents above the trading prices of the last couple of months. But it is a big discount to THL's net tangible assets of about $1.34.
The terms imply THL is worth 65 per cent less than its net equity, while Kea and United are worth just 22 per cent less.
THL itself notes the transaction values imply a discount to Kea and United's operating assets of 10 per cent, but a discount of 39 per cent on its own operating assets.
The company justifies these differences by arguing it is buying full control of Kea and United's assets, as well as improving its cost and capital expenditure position with the acquisitions. And if the assets aren't worth quite as much as it hoped, it has some downside protection with the $8m deferred settlement.
As for the benefits, THL thinks by 2014 its net profit will be 27 per cent higher than otherwise and dividends will be boosted by 2c a share.
Based on a price to earnings per share multiple of 9.5, THL says its shares would be worth $1.26 in 2014. These sound like good numbers, although it's worth noting that THL seems to be expecting some good times to come even without the acquisition.
For example, status quo forecasts are for modest revenue growth but hefty net profit gains from $4.5m this year to $11.6m in 2014. Dividends are forecast to rise from 4c to 6c a share.
Given the current challenges in the market, such an optimistic outlook is encouraging, but surprising.
So far the market has welcomed news of the merger - THL shares lifted about 17 per cent - and it seems a good defensive move to combat the economic conditions.
Given the management's forecasts, THL sees considerable profit upside from operational improvements and cost-cutting, amplified by acquiring Kea and United. If it delivers those results, shareholders should be rewarded.
Tim Hunter is deputy editor of Fairfax's Business Bureau.
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