TUI Travel (LSE: TT) announced today that after several months of negotiations, it has reached a final agreement on an all-share, no-premium merger with its German counterpart Tui AG, creating a group valued at about £5.2bn.
The good news for TUI’s UK investors is that the company will be domiciled in Germany, but listed on the London Stock Exchange. So there’s no need to worry about the issue of holding German shares in your brokerage account.
All in all, TUI shareholders will own 46% of the combined group and although UK shareholders will receive no premium for their TUI shares, they will receive an enlarged interim dividend of 20.5p a share.
But should you buy in?
This merger is actually great news for the shareholders of both companies. As stated by Sir Michael Hodgkinson, Deputy Chairman and Senior Independent Director of TUI Travel within today’s press release on the matter:
“The Board of TUI Travel is focused on delivering shareholder value and I and my fellow independent directors are confident that the finalised terms of this Merger represent significant value for our shareholders. By simplifying the structure and combining the two businesses substantial synergies and cost savings will be realised. In addition, the potential to deliver material commercial benefits will be unlocked.”
According to the press release, combining the two businesses will allow corporate cost savings of at least £36m per annum. Additionally, the unified ownership structure will delivered a decrease in the underlying effective tax rate of around 7 percentage points, to around 24%.
Joint management and vertical integration is also expected to improve own brand, tour group, hotel and cruise occupancy levels. Each 1% improvement in occupancy is expected to deliver approximately £4.9m additional profit. Integration of the two groups will also allow for the combined group to double the pace of existing investment plans, with more than 30 additional hotels and up to two additional cruise ships planned for construction in the near future.
All in all, there’s no doubt that today’s news will add a significant boost to TUI’s growth and profitability. Nevertheless, with analyst coverage on the deal still thin on the ground, it’s hard to put a valuation on the enlarged group.
The bottom line
Having said all of the above, TUI does look attractive on a valuation basis in its current form. The company currently trades at a forward P/E of 11.7 and supports a dividend yield of 3.7%, covered nearly two-and-a-half times by earnings per share.
So, based on these figures, and consider the fact that the new combined group will see costs fall and profit rise, TUI could be a good long-term bet.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.