Thomas Cook India – Fairfax ups equity stake and other updates

Thomas Cook allotted 1.827cr equity shares in lieu of 18.27 lakh preference shares to its promoters taking the promoters equity stake in the company from 72.9% to 74.7%. The total shares outstanding in the company today are 27.27 cr of Re1 each.

http://www.bseindia.com/corporates/ann.aspx?scrip=500413%20&dur=A

Stepping out of the preference cover to take on risks and rewards of equity is generally perceived as move of faith. I do not have any reason to believe other wise.

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Excerpts from the Fairfax Annual Letter by Prem Watsa

http://www.fairfax.ca/files/doc_financials/Final-2014-Annual-Report-for-website_v002_q64b02.pdf

Mr. Modi’s election led us to rethink the investment opportunities in India and our ability to fund them. While we have $26 billion in investments at Fairfax, regulatory constraints limit our ability to invest significant amounts in India. Given our excellent long term track record investing in India, our very significant on the ground resources with Harsha Raghavan at Fairbridge, Madhavan Menon at Thomas Cook India, Ajit Isaac at Quess (the new name for IKYA), Ramesh Ramanathan at Sterling Resorts and also S. Gopalakrishnan, the long serving head of investments at ICICI Lombard, we felt it was appropriate to create a new public company, Fairfax India, to invest in India. In early 2015, Fairfax India went public, raising $1.1 billion and listing on the Toronto Stock Exchange. Fairfax provided $300 million of that capital by purchasing multiple voting shares, giving it 28% of the equity and 95% of the votes. A number of institutional investors, almost all existing long term Fairfax shareholders, invested approximately 90% of the remaining $800 million raised. We are very excited about the long term prospects for Fairfax India under the leadership of Chandran Ratnaswami as CEO and John Varnell as CFO. 

Besides benefitting as a shareholder from its $300 million investment, Fairfax will receive fees from Fairfax India. As we wanted the fees to be very fair for the long term investors in Fairfax India, we structured them after negotiations with Fidelity, the largest cornerstone investor. The fees are as follows: (i) an administration and advisory fee of 1⁄2% of undeployed capital and 11⁄2% of capital invested in India. Fairfax will bear the full compensation costs of Fairfax India’s senior employees; and (ii) a performance fee, calculated over three-year periods, equal to 20% of any return, calculated from inception, above a 5% annual hurdle, payable in shares of Fairfax India (if the shares are trading at more than two times their net asset value, Fairfax has the option of taking the fee in cash). 

Last year we said that Thomas Cook India would be our vehicle for further expansion in India. For the reasons mentioned above, we have now added Fairfax India as an investment vehicle in India. Thomas Cook India’s resources may constrain the size of deals it can do, although we expect that deals in its area of expertise will continue to be done in that company. In determining the appropriate vehicle for any investment, we will consider all of the relevant circumstances and we will be fair, as always, in order not to disadvantage one of these vehicles. 

Also last year, I mentioned how excited I was about our investment in Thomas Cook India, and through it in IKYA Human Resources (now rechristened as Quess Human Resources) and Sterling Resorts. These wonderful businesses Thomas Cook India invested heavily in online distribution, resulting in a 350% increase in inbound calls, and on the innovation front, it launched ‘‘Holiday Savings Accounts’’, a first of a kind product under which interest-bearing bank accounts are opened in customers’ names, enabling them to make monthly payments towards a holiday. These accounts are aimed at accessing a new category of traveler with lower disposable income, who would not normally approach Thomas Cook India as a customer. The unique selling proposition is that the customer pays for a future holiday at today’s price, protecting the cost of the holiday from inflation. In another area, the foreign exchange business grew at an outstanding pace, 85% in wholesale, 17% in retail and 222% in online sales. Madhavan Menon continues to provide outstanding leadership at Thomas Cook India. 

IKYA Human Resources was renamed Quess Human Resources, and under Ajit Isaac’s dynamic leadership, it experienced a year of exceptional growth. In U.S. dollar terms, compared to full year 2013, revenues grew 41%, EBITDA 131% and net earnings 363%! These numbers were driven by associate headcount growth of 28%, from 67,000 in 2013 to 86,000, in 2014. The growth was achieved both organically and by exceptionally low-priced acquisitions in India and North America: Quess acquired Hofincons, a market leader in industrial asset management in India; Brainhunter, a Toronto-based IT staffing firm; and Fairfax’s own MFX IT services. Quess is well positioned for continued dramatic growth in the years to come. 

Under Ramesh Ramanathan’s exceptional leadership, Sterling Resorts increased the number of its resorts from 15 to 21 and its rooms in operation from 1,500 to 1,634, and continued the rejuvenation of its existing properties with the refurbishment of 119 rooms (a further 551 rooms are scheduled to be refurbished in 2015). Vacation Ownership membership grew by 55%, from 3,232 in 2013 to 4,992 in 2014, and occupancy increased from 47% in 2013 to 54% in 2014. 

The great expectations we had for our Indian businesses only continue to grow, particularly with all the positive changes we expect to see from the government of Prime Minister Modi. 

Key Takeaways from this letter:

• Watsa still loves Thomas Cook but his appetite for investment into India cannot be satiated by Thomas Cooks resources.
• Thomas Cook will probably not diversify or rather it might just stick to its three verticals of travel services, holidays and staffing. Thus possibility of the company becoming a part PE fund can be put to rest and we can be sure that further acquisitions will be for the existing verticals only.
• Watsa’s genius of charging Fairfax a management fee payable to the shareholders of Fairfax, has to be appreciated.
• The Uncertainty in Thomas Cook has largely reduced, and it should now gain more attention from mutual funds as they can finally “project” the companies earnings.

Interesting times ahead for Thomas Cook India and exciting times for Fairfax India.