M&A Announcement

Feb 7, 2020

Slides

Good morning, ladies and gentlemen, and welcome to TUI Group's Update Conference Call. At this time, all participants have been placed on a listen only mode and the floor will be open for questions following the presentation. The call today will last for thirty minutes. Let me now turn the floor over to your hosts, Friedrich Jussen and Birgit Koenigs. So good morning, everybody, from Hamburg. It has been a busy night tonight and I can say that it was anyhow, I think, a very successful night because we could sign our agreement with TUIKHUSES and Royal Caribbean this morning. And therefore, I'm very happy to have you on the call so short term. And thank you for being present just before our results announcement in next week. So a couple of thoughts, just a couple of slides and then we are open for your questions. First slide, it highlights our strategy again, which you all know. It is the same slide we showed in December. Just to recap, we want to defend our market shares and grow our markets in the market and airline business. So we will talk about that when we talk about the results. Then we have the bottom two boxes, GDN OTA destination experience, our new digitalization efforts. Are in the midst of digital transformation. We will become a digital platform company in the next years. And then we have what is today the core of the business holiday experiences. When it came to vertical integration, you can recall we always said vertical integration is content centric. We deliver premium returns in the content through the scale in the markets. That is the strategy. Now historically, we have actually been growing through assets, and we have actually reinvested proceeds from actually our disposals in assets. We also have said in the future, there will be more asset right. Asset right means we invest when it's necessary on our balance sheet. And if it's possible, we will actually not invest but be more asset light. And the first step the next step we are doing right now is in that direction is actually the disposal of hapakloid into our joint venture to a cruises. So it is in line with the strategy. What is the deal? We sell Hapag Lloyds, which we operate in over 100%, into the Tuohy Cruises joint venture for enterprise value of €1,200,000,000 When you think about Hapag Lloyd's, just five years ago, it was making losses. Tried to find a buyer who would pay the book value. Fortunately, we didn't find a buyer at that point in time. We restructured the business. Now it's 1,200,000,000 The nice thing on top of that is not only we get the proceeds and deleverage the company through the deconsolidation of debt, I come to that, but also we retain the profit pool of 50% for the future growth and synergies. We assume that this will be another EUR 300,000,000 plus value, that will come on top of EUR 1,200,000,000.0. The whole transaction is largely debt financed. We do a little bit of equity injection of €75,000,000 hour piece and €75,000,000 of course, of oil Caribbean. Everything else is debt financed in the company to a causes. The debt facilities of that company is strong enough to do that and retain the dividends, which we have envisaged. So therefore, that is very good and closing anticipated for midsummer. Now when I look at the strategic and financial benefits, let's look at the strategic benefits first. TUI Cruises has been an extreme success. We always say it's the most profitable cruise company in the world, at least in the world, Caribbean world, because there we have comparisons. And of course, vertical integration is important because our sales power is very strong. The problem and the challenge and also, let's say, the positives on touring courses are growing fast enough because your capacity is limited, That actually generates it's also part of the premium returns, but it's also limiting growth. At the same time, we have Harpag Lloyd. Harpag Lloyd was a German focused luxury brand or German luxury and expedition brand. International expansion was always something we wanted to do, but was a little bit risky because we don't have this international footprint and also the question of financing on balance sheet financing would have been an issue. So the idea now is we put both companies together, the two equals will be growing because it can grow through Harpag Lloyd. And Harpag Lloyd can be growing because it has access to the international footprint of Royal Caribbean and that facility is which we have in free in Royal Caribbean. So it's a win win and strategic. Both companies could have couldn't have been more for different reasons now grow. So the benefits we are leveraging here is very clear that we keep the brand product marketing and sales. That is what our specialty is. And we use our sales shipbuilding know how and global footprint. And because we get €1,200,000,000 we get access to the additional value, we keep our power dry for digital expansion because we don't have to finance the growth in two equals and half parallel growth because that will be done in two equals joint venture. Now on the financial side, it's also very attractive because 1,200,000,000.0 is a very attractive size. Particularly when you think about it, we put 75,000,000,000 equity and we get 1,200,000,000.0. This is very attractive. On top of that, we get the 300,000,000 plus synergy value plus growth. For Royal Caribbean, it's also a very good deal because they put $75,000,000 also achieved the $300,000,000 plus, and they have the strategic benefit to get access to the best cruise brand in the world. And therefore, I think it's a win win for both of us. As you know, I'm very excited with my partnership with Royal Caribbean because they are good partners. We have a long experience and a very serious and good partnership in that respect. We on the financial side, as I said, Zuikr was very cash generative. It has a good debt facilities. We are well within covenants, particularly when it comes to all the ACC financing. As you know, is very important in that business. And we will see no reduction of dividends to TUI. And particularly, will be displeased because we will be strengthening our balance sheet. We have said that we will do put money into digital expansion. And this year, we talked about high double digit. Of course, we anticipated already earlier in the year that the likelihood of having a deal like this something like this would be possible. So a lot of this will be actually now put into the deleveraging of the company. And when you look on the next slide, you'll see the enterprise value is 1.2%. The net proceeds will be around 700%. The other thing the other the remainder is actually the equity injections and the deleveraging. The deleveraging will create something like 0.2% close to 0.2 gross debt leverage improvement in the gross debt area. Of course, the additional cash is available, and therefore, you could take that also into account. So it is something which is good for our balance sheet. And when you look at our capital new capital allocation framework, we always have said organic asset right growth, that's what we do. This digitalization, again, it's largely organic. And we also have said we will look that we have a healthy balance sheet as well. And therefore, you might be pleased that we adhere to that and we are conservative in that respect. That said, I think it's a great deal for both of us, for RCL as well as for us. It is a great deal for TUI Cruises and Harvag Lloyd because it unleashes growth potential asset rights and a potential which at the end of the day wouldn't have been possible. We envisage that three years from now, 50% of what actually we bring into two Ecruzis of hapaglut, 50% will be at least the value of the 100% today. So that's what the deal will be doing for us. So we believe it's something which is a no brainer and a very good thing to do. And we are very happy that we pulled it over this morning. Thank you very much for listening in, and now we are open for your questions. Thank you. I see we have some questions here already, so we can start the call. The first question for today comes from Ms. Jamie Rollo calling from Morgan Stanley. Over to you. Yes. That's me. Hello. Good morning, everyone. Yes. Three questions, please. First of all, I'm just wondering, would you have done this transaction if you had lost if the company had lost about 700,000,000 from the MAX grounding last year and this year and being so close to the leverage target? In other words, is this is there any sort of industrial logic behind this? Or is it just a shore up to the balance sheet? Secondly, it looks like essentially leverage on Hapag Lloyd is going to be about €1,000,000,000 albeit, I guess, shareholder loans. But it looks like the combined two accrued entities are going have pretty high leverage. So could you talk a bit about the pro form a leverage on that joint venture? I agree it's off balance sheet, but just trying to understand that. And the final question is where does it leave Marella in The UK? Could that be another option to sell into the JV in future? Thank you. Okay, Jamie. I mean, I'll try to explain the logic. I mean, you get €1,200,000,000 your EBITDA your EBIT contribution in three years will be what would have been on 100%. When you look at valuations, when you look at everything, you have two companies which couldn't have grown, now grow. The industrial logic is so compelling and that actually that is something which I think is an absolute no brainer. The leverage in the company is around four, which is for a cruise company is not big. I mean, not at all. The cash capabilities of that business is and the cash flows are enormous. Magala, yes. I mean, we have set in our strategy that we will be asset right. And when I say we are asset right, then I mean we are asset right. We will look at things and if things are compelling, we will do it. And I think I don't know, but I mean, you know, particularly many people would have said maybe, you know, oh, this is a core of the business, will they do it, and so on and so on. We have said we will become a digital platform company. When I say we want to become a digital platform company, that's what it will be. And if we find, you know, good deals, but it must be always good deals. We can we will not do deals just for making deals, but we only will make compelling deals. And if this deal is not compelling, I would not I will not understand it. Yes, So maybe I can add also to what Fritz said. So the deal makes both strategic and financial sense. And of course, as Fritz already alluded to, together with Royal Caribbean, we will be able to accelerate growth significantly. And how we will treat this is we will look at our new capital allocation policy. And indeed, we do have Boeing MAX issues. So in light of that, in the short run, we will use the proceeds according to this new capital allocation policy taking into account leverage, etcetera. But on the longer run, that is what we see with the increased earnings that we will generate from hapaglutide. We will also further invest into our new strategy with digitalization and everything we communicated. Okay, thanks. Thank you. The next question comes from James Ayn Lee calling from Citi. Please go ahead. Good morning. Yes, morning, everybody. Thanks for taking my questions. I've got three, please. First is, can you tell us what the book value of the business is? Second, could you quantify the synergies? I know you said there was 300,000,000 of synergy value, but what do think the annual run rate could be? And then third, how do you plan to internationalize the business? Because I guess they're both Tui Cruises and Vagaloid are very German focused brands at the moment. So how do you plan to internationalize? And would you need to invest some of the synergies to do that? Thank you. So the synergies are do we publish synergies? I mean, I think we might not even do that. But on the what I said is in three years, we will make up for actually 50% which we give up. So therefore, this is partly synergies, partly growth. Of course, then this is only a snapshot. It will grow over time. I'd say the net present value quantification, I said, is at least EUR 300,000,000, I see even more. On the internationalization, this mainly focus on the expedition and not so much on initially on the expedition and not so much on the initially on the ultra luxury. I mean, the Expedition is a no brainer. When you the look demand increase of Expedition cruising in the world, it's enormous. And I have a lot of new tonnage coming up, and we have we are the one of the oldest expedition and most experienced, and by the way, the most luxurious expedition company in the world with ice class quality ships everywhere. We are one of the few who really go Antarctica. We are one of the few who really go very extreme conditions, and that is something which is very compelling to customers. And here, of course, the international footprint of Royal Caribbean is also very important when it comes to the whole harbor management and route management and network and so on. So that's also very important. So it will be the luxury crew, luxury expedition, which we will initially focus to. Now on the last Yes, the book gain, so we said considerable book gain and this means mid triple digit millions. Okay. Thank you very much. Thank you. The next question for today comes from Richard Clarke calling from Bernstein. Please go ahead. Good morning. I think that was me. Yeah. Just three questions for me. Just want to make sure I completely understand the bridge from the £1,200,000,000 to the £700,000,000 proceeds. So presumably, of that is lease debt, but maybe just the terms of this earnout, the £63,000,000 earnout. Is that a one year earn out or is that over multiple years? Second question, the impact on the JV income. You said no reduction in dividends, but does that mean dividends probably flat? And what will be the impact on the actual JV income given the higher debt within TUI Cruises JV? And you talked about the ability to accelerate growth. How does that actually come about given the restrictions and the ability to get new ships? Does Royal Caribbean give access to new expedition ships to put into the JV? How do they get better access to that growth? Okay. So on the last one, maybe I say at least Burgitt's with the two first. I mean the last the restriction of the yard capacity is focused on the big ships, right? The small ships, the yard capacity is not a problem, right? So that is what we always said and we have actually now also partnerships. So but but, you know, again, this hour look at our years, our years are all above 600. If you want to expand in ultra luxury, you know, it would be dangerous to expand too much in Germany because the enemy of high yields is actually volume. And we believe that international is the right way to go. And they are the restriction of the art is not an issue. But additively new ships, so we are not any in in used ships with that kind of brand, which is the highest rated luxury brand in the world when it comes to the bullet cruise guide. So we always need to be number one, so used ships are not an option here. Maybe on the two other things. Yeah. So in terms of valuation and proceeds, you asked about the bridge. So clearly, EUR 43,000,000 EBIT for the full year 2019 times the EUR 28 times multiple, I guess, is to the EUR 1,200,000,000.0, but I'm very much sure that you got that. And from that, if you deduct the net debt and the equity contribution, you get to the EUR 700,000,000 proceeds. And as we are sitting here with the deal team and Peter Kruger, who actually closed the deal, I'm going to hand over to you, so maybe you can also comment on the earn out and how we structure that. Yes. Sure. So as Gurgi said, there will be an earn out of €62,500,000 and that is linked to the financial performance of the company of Harpag Lloyd until September year end. So you can see we're already halfway through the earn out, which effectively gives good visibility on on the achievement level of the earn out. Okay. Okay. So the so the so the proceeds could be 762,500,000.0. The 700 is included? No. It's already included. So you need Okay. Yeah. Yeah. Yeah. It's in there. So the up yeah. Yeah. So the upfront cash is 600 and, whatever that would be, 36,000,000. Yes. And there's a there's a bit there's a there's a variable component on top of that that would take over seven. Yes. The financial year our financial year end. Yeah. And then just a comment on no reduction of dividend. Does that can we interpret that to mean that the dividend will probably stay relatively flat while the company deleverages or Yeah. Can it Actually, a very simple way to explain is that the synergies the future synergies will compensate the additional financing cost. So they will go up. They will not be flat. They will be according to our numbers in the existing plan, yes. But you can see I mean, the EBITDA, which we also had in our announcement for 2020 is already 90. Thank you. Thank you. We have another question from Mark Fortescue calling from Stifel. Please go ahead. Hi, good morning. My questions have been answered actually. Thank you. Okay, thank We'll move on to the next one then. The next question is from Jens Roland Clark, who's calling from Barclays. Please go ahead. Good morning. Thank you for taking my questions. I've got two, please. The cash from the transaction, you've roughly £700,000,000 in net cash. How much of that is going to deleveraging the business? And how much is going into the digital platform investment? And you're also sticking to that 50,000,000 to £90,000,000 spend for this year. So how should we think about that for next year given the cash you're going to have in the summer once that's completed? Secondly, could you help us split out where the synergies are coming from in the JV once you've acquired Hapag Lloyd? And also finally, I presume you're going to not report Hapag Lloyd in the JV separately once it's completed? So the synergy is very clear. I mean, both we sit in the building here and both sit in the same building. And one is a very big company, one is a very small company. We will synergize whenever it's possible except the brand. I mean, so the meaning the brand product proposition that stays because it's a little bit like Bugatti and Volkswagen, right? So so of Bugatti and Audi. So it's a part of the same family. There are synergies, but at the same time, the brand needs to be queuing very separately. On the what was the first question again? Yes, I can do that. So the first question is the cash. So the EUR 700,000,000 includes the earn out as we just discussed during And the previous so as I said when I answered the first question, so we will look at our new capital So given the situation where we are in just now, we will balance everything and we will prioritize now the balance sheet because we do have the situation of Boeing MAX, although it doesn't have to do with the transaction, of course, as we also explained. But you always have to look at your capital allocation policy given the situation where we're in. So in the short run, we will use the proceeds to delever. And then you asked the question about digitalization expenses that we made, the double digit million expenses and that is that just doesn't relate now to the proceeds because we already have included that in all of our plans. And we will talk more about that during the Q1 results as you will hear next week. And then on the JVs, you were asking about transparency and that is something that we clearly said that we will be working also with the IR team, etcetera, so that we can provide enough transparency on all of our JV structures going forward. So that is a work in progress. I mean, the important point is, I think we have very clearly looked at that. And I said, powered right. The point is we have a high double digit investment and I think that is for this year perfectly fine. So for this year, you will see a full deleverage. And but if this is successful, and we are very convinced it will be successful, then the transformation will be going on and it will be not the last deal we do and it will be not the last proceeds we get. When you look at trading, will not be I'm not talking today about trading, but you know, so the world will go on, and, you know, we will become a different platform company five years from now. And that's what we have said, and with that, you know, I think it's important that we we have asset right and asset structures in place. And with the transaction, it is faster growth and deleveraging and access to significant funds. So that for us, it's a good deal in all respects. Thank you. Thank you. The next question comes from Stuart Gordon calling from Berenberg. Please go ahead. Yes. Good morning. Just could you chat through you talked about the internationalization of the business. Two cruises, what proportion of their bookings come via RCL only channels that we could get a flavor for perhaps how they could help here? Secondly, just again Could you explain why these synergies couldn't have been extracted without Hapag Lloyd being part of the joint venture? And finally, and I'm sure this is there's a very simple answer to this I'm just missing. The net proceeds of $700,000,000 in Slide five, but it looks as if you talk about pro form a going from $910,000,000 of net debt to $80,000,000 That looks like $1,000,000,000 of a shift in net debt. So can you just confirm to me what the EUR 300,000,000 gap is there? Thank you. So I'll start with the bridge from the EUR $910,000,000 the 1,000,000,000 that you are referring to, getting us to the plus EUR 80 that is, let's say, €700,000,000 we said it's including earn out. So deduct from the €700,000,000 the earn out, let's say, roughly $630,000,000 as was mentioned on the call. And then from that, you deduct the debt facilities in comparison with 2019. So that gets us to the plus €80,000,000 the pro form a. Okay. Sales via RCL zero. I mean, you know, this is a German sales. I mean, all the sales are done by us. And the synergies is actually couldn't we have done the synergies before? I mean, I think no. When you look at you have a detailed bottom up plan of the synergies, This comes to do you need one CFO or two CFOs? Or do you need one office or two offices? Or do you need one customer care or two customer cares? Or do you need one accounting or two accounting? I mean, when you have two you have two companies, you need two accounting, you need two CFOs. Mean, term, there are synergies which are where we do things together. Sales, how many salespeople do we have in the field and so on and so on. Today is always two to two. But now the important point anyhow is the brand must not dilute, and that is very clear, but I come from the brand industry and know how to un multi brand. And also I see the marketing guys here, they have a full understanding how important the value of the brand is. So that is by the product, the brand, by the customer care, and these are the things where we need to be separated and we want to be separated, and because it's a difference if you have, you know, 170, 180 per diem or if you have a six forty per diem, right? And that's something which is also very clear. Okay, thank you. Thank you. And the last question for today comes from Jurgen Karb calling from Kepler Cheuvreux. Over to you. You very much. There. Just two questions from my side, please. First of all, again, coming back on the Marella topic. Would the deal have not been possible if you would have added Marella into this whole structure? Just getting your thoughts on why you did not include Marella because it would have probably cleaned the whole division maybe also from the outside modeling point of view a little bit clearer in a clearer setup? And secondly, when do you think you can really add value from that transaction thinking about you give away 50% of the business that is doing about a 16.5 EBIT margin or so. You put a lot of money into debt reduction, which is not very value creative. But then you're saying you're generating additional growth. So when do you think this deal will be really value creative on your side? Thank you. Okay. I'll try to make the point. I mean, we cash in €1,200,000,000 and we will have EBITDA, so EBITDA, you know, neutral after three years. I mean, you know, how much more value, how much better can you create value? I mean, I don't know many transactions who are of that quality. By the way, I mean 1,200,000,000.0, as I said, we would have had difficulties to sell to the book value of the company at that point in time, which was more or less EUR 100,000,000, I mean, four years or five years ago. I would say in the last four years, five years, value accretive and I think value accretive also in the future. And if it was just for ease of reporting and for ease of your models, we would have included Magana immediately. Unfortunately, that's not the prime target of our M1A strategies. And there are many different points which need to be considered that with all of our asset structures. And I mean, when you look at our balance sheets, we have said that we will be asset right. That says we look at each and every asset on the balance sheet. And it is on the continuous evaluation how much it is critical to our business, how we actually finance growth best, what we can do to push the business forward, and Magana will be part of it as well as other assets as well. So therefore, for the time being, I would say the hapag Lloyd is something we say in Germany, so we just it's a slam dunk. It's easy, it's growth, it's cash, it's value accretive without any. So it was so obvious, not only for us, but also for Royal Caribbean, it was so obvious that we were the right partners in that business as well for all our other JVs or asset companies asset holdings. We will have we have similar thoughts and thought processes. And Peter, you heard of as our M and A boss is also our Head of Strategy, and I think he is thinking about many things. It's not the end of our transactions. It's also not the start, you know, that's also clear. And whenever things make sense, we will do things. And maybe that's the only thing I can say to them. Okay. Thank you very much for all of you to be on the call. I wish you a splendid Friday and a great weekend. Thank you for your participation. You may now disconnect. The conference is no longer being recorded.