NEWSMAKER. Mahindra Holidays lands a good deal in Holiday Club Resorts, but debt worries drag down stock

2014 seems to be the year of mergers and acquisitions for vacation ownership companies in India. In February, Thomas Cook acquired Sterling Holidays, the country’s second-largest vacation ownership company.

And yesterday, Mahindra Holidays, the market leader, announced its plans to buy Finnish major Holiday Club Resorts - a deal which adds significantly to its room count and geographical reach.

The Mahindra Holidays stock is, however, down by 1.4 per cent, probably on worries that its hitherto low debt may rise.

Gunning for inorganic growth

The two-step deal entered into by Mahindra Holidays with Holiday Club Resorts – an 18.8 per cent stake buy now with a right to increase ownership to 100 per cent over a period of two years - is a leap along the inorganic growth path.

As part of its expansion strategy, Mahindra Holidays has been buying resorts both abroad and in India, the latest being the snapping up of a 60-room resort in Manali, Himachal Pradesh last month.

But the Holiday Club Resorts acquisition is significantly larger in terms of size and ambition. Reports suggest that Mahindra Holidays will pay €13 million (about Rs 106 crore) for the 18.8 per cent stake. This values Holiday Club Resorts at about Rs 564 crore - the ultimate deal value if Mahindra Holidays opts for a complete buyout in the future. This is nearly a fifth of the current market capitalisation of Mahindra Holidays.

Even so, Mahindra Holidays seems to have got a good deal. At 0.5 times annualised sales for the current financial year, Holiday Club has been valued far lower than the 7.7 times sales Sterling Holidays was valued at by Thomas Cook. Also, unlike Sterling Holidays, the Finnish company is profitable. On a price-to-annualised earnings basis, Holiday Club has been valued at 9 times, again much lower than the nearly 33 times Mahindra Holidays currently trades at.

On full acquisition of Holiday Club Resorts, Mahindra Holidays will count among the global majors in vacation ownership with a significant presence especially in Europe. Holiday Club’s 32 resorts, 2,800 room inventory and about 50,000 members will add significantly to Mahindra Holiday’s 41 resorts, 2,500 room inventory and about 171,000 members.

The company says that the combined entity has the potential to become the largest vacation ownership company in the world, outside the United States.

Stock reaction

But the market seems to have reservations about the deal with the Mahindra Holidays stock marked down 1.41 per cent. This may be due to concerns pertaining to the high debt the company will have to take on.

Currently, Mahindra Holidays is almost debt-free while Holiday Club has debt of about Rs 400 crore. With cash of just about Rs 48 crore as of March 2014, Mahindra Holidays will have to resort to significant borrowing to fund the initial stake buy worth Rs 106 crore and the remaining amount of Rs 458 crore over the next two years. Still, the company’s debt-to-equity will remain comfortable at under 1 time.

The last fiscal year was difficult for Mahindra Holidays with weak economic conditions impacting consumer sentiment and, consequently, sale of vacation ownerships. Its consolidated profit for the year was down 4 per cent.

But expectations of a pick-up in the economy with a new Government at the helm have seen the stock rally nearly 50 per cent since February. Now, with a significant international presence through Holiday Club Resorts, the company also has a hedge if weakness in the domestic market continues.

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