All you need to know about Thomas Cook-Sterling deal

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Tour operator Thomas Cook (India) on Saturday announced that it will merge its operations with resort owner Sterling Holiday Resorts India in a deal valued at Rs 870 crore.

The merger, which is expected to close by the fourth quarter of 2014, will give Thomas Cook access to Sterling Resorts' 19 properties in 16 holiday destinations across India.

The deal will be structured in a multi-stage process in which 100 shares of Sterling will be swapped for 120 shares of Thomas Cook (India).

According to CNBC-TV18 analysis, the deal is good for Sterling but with limited upside. However, it will lead to huge equity dilution for Thomas Cook.

We take a quick look at how this deal will go through and what it means to the respective companies.

Sterling Holiday

Sterling Holidays has a market cap of Rs 633 crore (at a current market price of Rs 92.9). The company’s debt stands at Rs 43 crore. Sterling Holiday’s stock has risen by nearly 58 percent in the past six months. The company reported net losses in seven of the past eight quarters, though the level of losses has been coming down.

Thomas Cook

The deal will be financed via Rs 500-crore issue of compulsorily convertible preference shares (CCPS) to its promoter Fairfax Financial and internal accruals. The merger will lead to a dilution in Thomas Cook’s equity base.

Assuming that the open offer is fully subscribed, and the CCPS are converted, the equity dilution in the company would be around 39 percent (the assumption here is that the CCPS are issued at the current price).

The deal stages

* The deal, which is expected to be completed by the end of financial year, values Sterling at about Rs 870 crore

* Once it goes through, Sterling Holidays will get delisted

* The deal will be completed in three stages:

Stage 1: Thomas Cook will acquire 23 percent of Sterling via preferential allotment at Rs 90.49 per share.

Stage 2: Thomas Cook will acquire 23 percent of Sterling from open market (this week)

Stage 3: The company will make a mandatory open offer for Rs 230 crore at 98 per share.

*Each shareholder who holds 100 Sterling shares will get 120 shares of Thomas Cook India with a share swap ratio of 120:100