Cox & Kings' UK takeover has logic, but not returns

Cox & Kings has done it again. For the ninth time in the past five years, the company has gone for an acquisition. In what is being billed as the largest overseas takeover by an Indian travel company, Cox & Kings has bought UK’s Holidaybreak for 312 million (Rs 2,300 crore).

Holidaybreak’s shareholders will get 432.1 pence per share in cash, a premium of 35.5 percent to the closing price of the company’s shares on 22 July. But is the acquisition beneficial to Indian shareholders? Cox & Kings touched a high of Rs 201 during initial trades on Thursday, but closed lower at Rs 191.35, near the low of the day. The market does not seem to be too excited with this acquisition.

[caption id=“attachment_50134” align=“alignleft” width=“380” caption=“there is a logic behind the acquisition as Holidaybreak will be able to get business from Indian travellers who go abroad in April-June, which is a lean season in Europe. Getty Images”]  [/caption]

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There is nothing surprising about the reaction. For the first half of the current year (calendar year), Holidaybreak has made a loss of 12.4 million compared to 11 million in the first half of the previous year, that too at the operating level. Its loss before tax has widened from 17.7 million to 19.2 million during the period under review. During the same period, Holidaybreak’s debt has increased from 129.2 million to 148.8 million, while its revenue has slipped from 150.2 million to 139.6 million. Despite the losses, the company has announced an interim dividend.

In order to meet the payment, Cox & Kings will be digging into their Rs 1,129.46 crore cash reserve and fund the remaining Rs 1,400 crore from a dollar-denominated debt from Axis Bank. At a consolidated level, Cox & Kings already has a debt of Rs 844.33 crore. The current acquisition will raise the company’s debt to over Rs 2,200 crore.

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However, there is a logic behind the acquisition as Holidaybreak will be able to get business from Indian travellers who go abroad in April-June, which is a lean season in Europe. Holidaybreak brings with it new product areas and markets which provide Cox & Kings a global network and accelerates the development of business of both the companies.

Cox & Kings, however, has not been able to deliver the numbers to its shareholders. Since 2007, the company has raised money every year either through debt or equity. Total liabilities of the company (shareholder funds plus total debt) have gone up from Rs 140 crore in the financial year ended March 2007 to Rs 2,052.18 crore in March 2011, a 14-fold spike. During the same period, the company’s sales have grown from Rs 96.95 crore to Rs 496.74 crore, a five-fold increase, while net profit increased from Rs 29.73 crore to Rs 129.09 crore.

The current acquisition will also widen Cox & Kings’ balance-sheet with returns taking a number of years to come. No doubt, the market is not enthused.