Shipping sale to finance tourism growth

TUI will sell off its container shipping business and use the proceeds to invest in tourism expansion. The decision is a major U-turn on the “twin-pillar” strategy of recent years.

The TUI supervisory board decided at its meeting last week to dispose of Hapag-Lloyd, its shipping subsidiary, following public pressure from Norwegian investor John Frederiksen who had demanded a break-up of the TUI group. The vote, which was reportedly very close, represents an end to TUI’s “twin-pillar” strategy of focusing on tourism and shipping. Critical investors and analysts have long demanded that the shipping business be separated in order to increase shareholder value and transparency. TUI chairman Michael Frenzel had planned to block these demands by merging TUI and Hapag-Lloyd and relocating the company to Hamburg, but only prompted open opposition from Frederiksen.

In response to the shareholder pressure, the supervisory board mandated the management to investigate all options, including a spin-off, a merger or a divestment of the shipping business as a single entity. Potential buyers include a Hamburg-based investor group and Asian shipping companies. Hapag-Lloyd is valued at €4 - 5 billion, according to German media reports. The proceeds of a sale will be used to reduce TUI’s debts but also to finance tourism growth.  

Speaking at the annual press conference, TUI chairman Michael Frenzel stressed that tourism would be TUI’s core business in future. The supervisory board stated that the management had been given the task of identifying further growth options in the tourism sector. According to Frenzel, these include further acquisitions of specialist tour operators and expansion in emerging markets such as Russia, India and China. TUI also wants to develop its hotels business, where it currently generates an attractive operating profit margin. Frenzel said TUI would “sharpen its profile and extend its portfolio” and did not exclude acquisitions. In the cruise sector, the joint venture with Royal Caribbean has recently been approved by the European Commission.

TUI has also announced its 2007 results. Group turnover rose 6.6% to €21,865 million, operating profits rose 47% to €616 million and pre-tax profits improved to €237.1 million from a deficit of €731.1 million in 2006.

The tourism division increased revenues by 11% to €15.6 billion and improved its operating profits by almost 14% to €449 million. The earnings growth was driven both by TUI Travel and TUI Hotels & Resorts. Due to the first-time consolidation of the turnover by First Choice since September 2007, TUI Travel’s turnover grew by 11.6% to €15.3 billion, including about €1.3 billion for the former First Choice activities. TUI Travel’s earnings rose by 17.7% to underlying EBITA of €304.4 million.  TUI Hotels & Resorts increased turnover by 9.5% to around €379.8 million while operating profits rose 18.6% to €146.1 million. The cruise business, Hapag-Lloyd Cruises, increased turnover 14.3% to €183.2 million and increased its operating profit by 79.7% to €14.2 million.

For 2008, TUI expects an increase in Group turnover of around €4 billion to €26 billion due to higher turnover expectations in the tourism and shipping divisions. The tourism division expects to increase its turnover to around €19 billion, mostly due to full-year consolidation of First Choice but also from growth in specialist holidays. TUI said that booking volumes remain strong at present, both for the current winter season and the 2008 summer season. Northern Europe turnover is up 7% for the winter and up 9% for the summer. Central Europe has turnover growth of 4% for the winter and 6% for the summer season. Western Europe is reporting turnover growth of 4%, both for the current winter season and the 2008 summer season.