What could Thomas Cook promoter stake sale mean for investors

Ever heard of a story where a company’s promoters sold 55 percent of their stake to a Dubai Financial group for Rs 46 per share in 2006 and two years later bought the same stake back for Rs 107 per share? Now in 2012, it is game for selling a full 77.11 percent of its stake in the company when the shares are trading at Rs 60!

[caption id=“attachment_239436” align=“alignleft” width=“380” caption=“Ever since talk of a stake sale hit the Street the stock has given good returns. It has grown 33 percent in the past one month. Reuters”]  [/caption]

The company mentioned above is travel and foreign exchange firm Thomas Cook. Thomas Cook PLC, which holds 77 percent stake in Thomas Cook India, had sold 55 percent of its stake to a Dubai Financial group. It bought the stake back in 2008 and now wants to sell it again. The parent company is cash strapped and needs money, reports Financial Express and the main bidders are Mahendra V Doshi, Madhavan Menon, Piramal Capital and Tata Capital.

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Doshi is the promoter of LKP Forex, a foreign exchange company that was merged with Thomas Cook in 2006 for Rs 200 crore. Menon is currently the managing director of Thomas Cook India. The other two interested parties are looking at the investment from a private equity perspective. Cox and Kings, the earlier favourite in the race, has clarified it is not a part of the bidding process anymore.

The bids must be submitted by 13 March but valuation will be a concern.

For the year 2011, Thomas Cook performed well, posting a net profit of Rs 56 crore. Its revenue and profits were above estimates though higher staff cost pulled down its operating profits by 30 bps (100 bps= 1 percent).

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So what does the stake sale mean for the investors?

Ever since talk of a stake sale hit the Street the stock has given good returns. It has grown 33 percent in the past one month. Hence, apart from the bidding price, who bids for the stake becomes crucial as well. Menon or Doshi will be preferred from the operational perspective. Doshi understands the forex business though he has no experience in the travel front, while Menon is running the company currently. Bidding along with a private equity partner will be welcome.

However, if only a private equity firm takes over the company by buying off the promoter stake, there will be questions over who will run the company. A case in point is Gokaldas Exports, the biggest apparel exporter in India. PE player Blackstone had bought a controlling stake in 2007 and nominated most of the board members, including the CEO. However, the company has suffered and struggled to grow since then and has a debt of almost Rs 320 crore.

Blackstone, on the other hand, has pledged all its shares and taken loans at an attractive rate in return.

By a similar logic, PE funds, with no particular interest or knowledge of the business will be a red signal for the stakeholders of Thomas Cook India.