How Thomas Cook India (TCI) Created Investor Value

ISBInsight: What was unique about Thomas Cook’s journey in India that got you interested in writing this case study?

Vikram Kuriyan: The primary reason was that Thomas Cook India (TCI), an integrated travel and travel related financial services company, was acquired in 2011 by renowned value investor Prem Watsa. Based in Toronto, billionaire businessman Watsa is the Founder, Chairman and Chief Executive Officer of Fairfax Financial Holdings. Watsa is called the “Canadian Warren Buffett.” He closely follows Buffett’s philosophy and structure in that he gets his funds from insurance operations. While Buffett does not invest in India by and large, Watsa, being of Indian origin, has familiarity with and has invested in India. Earlier, he had invested as a minority investor in ICICI Lombard, a private company. But this was his first controlled investment in India. I was curious how a value investor following Buffett’s philosophy would perform in India.

Secondly, the case examines a point in time six years after Watsa’s acquisition, when TCI’s strategy had yielded considerable success. At this point, Madhavan Menon, Managing Director of TCI, was faced with the task of charting the future course of the organisation to continue growing the business profitably.

The case mentions that conducting business in India is difficult and complicated. What are the unique challenges that Thomas Cook faced in India?

I don’t have an easy answer to that. There is a global threat to conventional travel businesses from online travel agencies. Is India moving online or is there a robust future in full service travel? One needs to understand the Indian mentality towards tourism. The proposition has to be attractive. Also, one needs to have local presence and understanding. Some things work, and some things don’t.

The outbound tourism business, i.e. Indians going overseas, has been a big success. Indians going abroad have a different holiday pattern when compared to Europeans and Americans, and Thomas Cook India has built a nice niche here, creating packages that really suit Indians. That is mentioned to some extent in the case too, where it says that Indians typically have difficulty with visa applications and need help with that process. So, the company understood the customer well and customised its offerings. Over time, it has created a good mind share in the Indian market for overseas travel.

Watsa believed in holding a buffer of cash to reduce risk and in tapping opportunities during the technology bubble of the late ‘90s and the housing bubble in the mid-2000s. What are the other benefits of a company holding cash reserves?

Generally, holding cash within a company is not a good idea. Companies ought to maximise shareholder value and holding cash does not add to shareholder value. So generally speaking, it’s a bad thing. However, good value investors subscribe to the idea of leaving a margin of safety. When times are exuberant, it’s a good time to raise cash. When times turn, and everyone needs cash, a good investor has the opportunity to do things with cash. I think Watsa is a big believer in having excess cash as one has opportunities when the environment turns, whether it’s in one’s own business or other businesses. He is unusual in that he likes to have access to cash so that when times are bad, he can go on the offense.

A lot of people distribute to the shareholders’ dividend or buy back when there is excess cash flow in a business. But investors like Watsa and Buffett are able to use the cash reserves creatively and productively, so that the firm value goes up if they are able to deploy the cash at the time of their choosing. That’s what they have done.

Could you discuss the relevance of this case for business practitioners, both from a turnaround and an investment perspective?

Two questions form the starting point: what would a control investor do? And, what would a business operator do?

This case is fascinating and unusual from a controlled investor point of view. How did Watsa create value in Thomas Cook? Most investors would invest surplus cash flows in the same business. But Watsa created value in an unusual way, by making acquisitions in other businesses. He did not have a high degree of confidence in the existing travel business. So, he invested surplus cash flows in other businesses.

TCI made a number of acquisitions. Watsa invested in a time share business called Sterling Resorts. Also, he acquired Quess– a staffing business that was totally unrelated to travel. That is very unusual. That’s a Buffett and Watsa move. They belong to a breed of investors who buy completely unrelated businesses. The journey of Thomas Cook would be very different under a strategic buyer or private equity investor than under Watsa.

Second, Watsa also made some operational changes. Thomas Cook was previously run to grow earnings– an accounting measure. Watsa changed the incentives of the people running the company from earnings to free cash flow. He focused management to generate cash rather than just grow. The operational idea was: grow, but it should be profitable growth.   Thomas Cook did well, but outsize value was realised from its acquisitions of Quess, the staffing company that grew very rapidly.

How did the two acquisitions play out in terms of Thomas Cook’s value?

For Thomas Cook India, the outsize return came from their investment in a totally unrelated business. This is an unusual way to invest.

It is interesting that the two big acquisitions (Quess and Sterling resorts) turned out so differently. The staffing business was a home run. It was an extraordinary investment. They bought this business at a fledgling stage when it was run by an exceptional entrepreneur. Ultimately, that business went public and their USD 50 million investment at one point went at USD 1.3 or 1.4 billion. So, they made 50 times their money on that one investment in about five years.

Sterling, by contrast, was not a huge success. I wouldn’t say it was a failure either. The business is worth more than what they bought it for, but they had to inject more capital. There could have been synergies between Thomas Cook and Sterling. But thinking like Buffett, Watsa did not buy Sterling for synergies. He bought it just as a business and sort of let it run by itself.

Sterling was a public company and then it was acquired by Thomas Cook India. So, its financials were subsumed under Thomas Cook. It is difficult for an outside investor to figure out what exactly is going on with Sterling. One possible way to unlock value, provide transparency and incentivise the Sterling team would be to list it once again.

Maybe time-share is ahead of its time in India. In the US, time share companies do well. In India, there are two major companies– Mahindra and Sterling. Mahindra is doing alright. Maybe there are concepts other than time share that Sterling needs to experiment with in order to create value.

What were the unexpected takeaways from class discussions of this case study?

Most acquisitions fail or don’t work out well– but this worked out beautifully. The big takeaway is that value investors can do different things from strategic investors and private equity. In this case, they went into unrelated business which no management consultant would recommend. Value investors such as Buffett and Watsa go against the grain. A second dimension is the sharp focus on financial returns. Given that the future was a little cloudy in the existing businesses, the controlling investor put in some amount but not a large amount. That financial discipline is another learning aspect of the case.

About the Writer:

Nikhila Chigurupati is a Content Associate at the Centre for Learning and Management Practice at the Indian School of Business.

About the Case:
Kuriyan V., Mamudipudi S., Shah G., and Chakraborty B., 2018. “Thomas Cook India: Potential Unleashed- A Journey to Value Creation”. Indian School of Business case. Harvard Business Publishing