W15463

FAIRFAX AND THOMAS COOK INDIA: PRIVATE EQUITY,

PERMANENT CAPITAL AND PUBLIC MARKETS

Emir Hrnjić, Nupur Pavan Bang, Vikram Kuriyan and Sanjay Bakshi wrote this case solely to provide material for class discussion.
The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have
disguised certain names and other identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the
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Copyright © 2015, National University of Singapore and Richard Ivey School of Business Foundation Version: 2015-10-08

On March 1, 2012, Harsha Raghavan, CEO of Fairbridge Capital Private Limited (a wholly owned
subsidiary of Canada-based Fairfax Financial Holdings Limited), rushed to a meeting in his office in
Mumbai, India. Raghavan, alongside top management officials from Fairfax, pondered how to evaluate
the pros and cons of the potential acquisition of Thomas Cook India Limited (a subsidiary of Thomas
Cook Group plc, with the National Stock Exchange ticker symbol THOMASCOOK). The team could not
help feeling that Thomas Cook India’s two segments (travel/related services and financial services) had
different potential in terms of growth and cash flow generation. Analysts predicted tremendous growth
potential in the travel business, although it would require additional investment, while the foreign
exchange segment had limited growth potential but generated significant cash flow. The company had
changed ownership several times in a short time period, while the stock price had plummeted from a
recent high of ₹61.95 to a low of ₹33.301 (see Exhibit 1).

Raghavan deliberated on whether buying the company fit the value-investing philosophy rigorously
followed by Fairfax’s CEO and chairman, Prem Watsa. Should Fairbridge bid for Thomas Cook India?
How much should it bid? Was the company worth more with two segments or was it better off by
splitting into two? Should Fairbridge delist Thomas Cook India or keep it public? Raghavan raised more
questions than answers.

FAIRFAX FINANCIAL HOLDINGS LIMITED2

Prem Watsa

Prem Watsa established his first asset management firm in 1984.3 One year later, he and his partners
injected capital and took control of almost-bankrupt Markel Financial Holdings, a Canada-based
specialist in trucking insurance. In several months, they reorganized the company and renamed it Fairfax
Financial Holdings Limited (Toronto Stock Exchange ticker symbol: FFH). The company had been under
the same management since September 1985.

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From 1985 to 2012, the company achieved an annual appreciation of 24.7 per cent in book value per
share. In 2012, Fairfax’s global portfolio of assets surpassed $30 billion,4 largely due to 28 years of
aggressive acquisitions. 5 As of December 31, 2011, the company, together with its subsidiaries, had
approximately 6,000 employees.6

In the insurance business, premiums were written and paid up front, but payouts typically took place after
months or years. In the meantime, the premiums could be used as a low-cost source of funds. This extra
cash flow was termed “float” in insurance jargon. Fairfax’s float at the end of 2011 stood at $14.4 billion,
up from $13.1 billion the previous year. In fact, following a slew of acquisitions in the five years
preceding 2011, the float had experienced a substantial growth of 36.9 per cent.7

Investing Philosophy

Nicknamed the “Warren Buffett of Canada,” 8 since his investment strategy resembled that of the
legendary American value investor, Watsa controlled about half the voting rights of Fairfax via a dual-
class share structure. He believed that a controlling stake would allow him to maintain focus and a long-
term orientation.

Since 1985, all of the Fairfax group of companies’ investments had been centrally managed by Hamblin
Watsa Investment Counsel Ltd., a wholly owned subsidiary of Fairfax. Hamblin Watsa combined
disciplined underwriting and a conservative value-investment philosophy, seeking to invest assets on a
total return basis, which included realized and unrealized gains over the long term.

In his first annual report in 1985, he explained the company’s foundation to investors:

Our investment philosophy is based on the value approach as laid out by Ben Graham and
practiced by his famous disciple, Warren Buffett. This means we buy stocks of financially sound
companies at prices below their underlying long-term values. We expect to make money over
time, not in the next month or two. In fact, in the short term, stock prices could go well below our
cost. In our purchases, we are always trying to first protect your capital from long-term losses (as
opposed to short-term price fluctuations).

See Exhibits 2 and 3.

Global Investing

While most of Watsa’s investments were concentrated on value investing based alpha and disciplined
underwriting, he also made occasional large macro bets. For instance, in 2005, Watsa predicted that U.S.
housing prices were approaching bubble territory and started building a position in credit default swaps.

When housing prices collapsed and credit default swaps were triggered, Fairfax realized a payoff of
nearly $2 billion, after having incurred a cost of only $341 million.9 Watsa had also taken a short position
on the market in 2007 to hedge his equity investments. While many financial institutions went bankrupt
or incurred huge losses, Fairfax generated record profitability in 2008 and 2009. Not convinced that the
global economic recovery was on sound financial footing, in 2010 Fairfax placed a series of deflation bets
via derivative contracts linked to consumer price index — once again, with an asymmetric payoff —
where it risked a small amount ($302 million) 10 to potentially make multiples on the investment if

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deflation took hold in the United States and Europe, as happened in Japan after that country’s financial
crisis. These macro bets produced a total gain of $6 billion for Fairfax.

Unlike many value investors who focused on their own country, Watsa expanded his “circle of
competence” by going global. Apart from allowing him to record impressive returns, these investments
offered global diversification for his portfolio. Among others, Fairfax had acquired Compagnie
Transcontinentale de Réassurance in France and Polish Re in Poland. Watsa had spread his wings in the
East as well. For instance, Odyssey Re had acquired 56 per cent of First Capital Insurance Limited in
Singapore 11and Pacific Insurance Berhad in Malaysia.12

INDIA

Business Environment

Most analysts partially attributed India’s immense growth potential to its large English-speaking, skilled
workforce and a sizeable population in the 18 to 35 age group. In addition to this, India provided a stable
political and legal environment that was conducive to business. While the recession had ravaged
developed economies in the West, the Indian economy was insulated due to robust domestic demand,
leaving Indian companies relatively unscathed.

Watsa appeared to be bullish on India and wanted to invest in companies that passed his stringent criteria
founded on a value-investing philosophy. In addition, Fairfax wanted to keep its portfolio of businesses
diversified. Even though emerging markets were typically prone to short-run fluctuations, Watsa believed
that India offered massive opportunities in the long run.13

Notwithstanding bureaucratic hassles, the business environment in India remained conducive to foreign
and domestic investors. Though the entrepreneurial ecosystem was still a work in progress, India’s future
potential seemed immense.

Private Equity

Raghavan succinctly summarized the typical private equity (PE) investing philosophy:

Globally, the PE industry is highly experienced at generating returns via financial engineering. For
instance, a PE owned firm typically holds roughly 80 per cent debt and 20 per cent equity and
therefore the equity valuation can grow by 100 per cent even when the enterprise value only
increases by 20 per cent. This is a highly effective strategy for PE funds that have an IRR [internal
rate of return] clock which is ticking away from the moment capital is invested into a deal.
However, the pitfall to this strategy is that the high leverage affects the solvency of a company,
thus creating risks that are hard to quantify in a downturn.

Since 2000, there had been large PE investments in India, mostly between 2006 and 2008. In the mid-
1990s, there were around 130 to 140 employees in the PE industry across all levels of seniority, scattered
across roughly 20 firms. By the mid-2000s, that number had grown to 2,000 investment professionals
across more than 300 firms. During the same time, dollars under management had grown tremendously.
In the mid-1990s, the amount of capital dedicated to India was under $500 million, whereas by the mid-
2000s foreign investors had rushed to India and invested about $32 billion in 2006 to 2008 alone.14

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Raghavan explained the uniqueness of the PE investing environment in India:

Global PE firms have set up offices in India and naturally would look to mimic strategies that have
worked successfully for them in other parts of the world. Yet, every market has its own paradigm
based on local regulations and cultures. For instance, take-privates and leveraged buyouts represent
the “bread and butter” of the PE industry in the U.S. The benefits are obvious: tax deductibility of
interest, low cost of debt and ability to make changes away from the scrutiny of activist public
shareholders. However, according to guidelines by the Reserve Bank of India [RBI], one cannot
use leverage to acquire companies in India, and the Securities and Exchange Board of India [SEBI]
guidelines around delisting are so onerous that it is practically impossible to delist a company in
India.

Very few PE funds were willing to do equity-only buyouts, since many investment professionals lacked
the expertise to take control and face the consequences of managing companies. If they took control of a
listed company, they also worried about the ability to exit, since they could not delist and could not
unload a large stake in the market, where midcaps traditionally suffered from poor liquidity.

As a result of the above factors, global players such as Blackstone, Carlyle and KKR — which typically
preferred to take controlling stakes in firms elsewhere — overwhelmingly preferred to take up minority
stakes in India. Taking a minority stake alongside an Indian promoter enabled a firm to share in the
upside without facing the daily operational headache of running the business, and also enabled the
investment firm to “point a finger” when things did not go according to plan.

Fairfax Enters India

In the late 1990s, Watsa met the then-chairman of ICICI Bank, K. V. Kamath, who convinced him to buy
a 10 per cent stake in ICICI Bank via public market transactions. The success of that stake motivated
Fairfax to join forces with ICICI in a private market transaction to set up a property and casualty insurer,
ICICI Lombard, which grew to become one of the largest private property and casualty reinsurers in
India. According to Indian regulations, foreign investors could own up to 26 per cent of an insurance
company. However, insurance companies in India were highly regulated and the constraints on how that
insurance float could be used were tremendous.

In 2011, Fairfax established an independent investment and acquisition company, Fairbridge Capital, with
the objective of identifying and acquiring undervalued yet strong businesses with sound management in
the Indian subcontinent. The wholly owned subsidiary was founded with the objective to keep its
investments in the $20 to $200 million range and keep acquired companies’ original management in
place. Potential targets were reputable firms with proven records of cash flow generation and corporate
values in accordance with the Fairfax guiding principles.

Raghavan explained Fairbridge’s investing philosophy:

There are four things to make a good investment: good industry, good company, good management
team and reasonable valuation. We try to exercise very strong discipline in investment judgment on
those four things, but we don’t pretend to be industry experts. We give management complete
freedom and a sense of stability, so that they can make long-term decisions. The only decisions that
we focus on are changes to the management team and capital allocation.

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Of the four above-mentioned things, we start by looking at the management. If we don’t get
completely convinced, then we don’t go forward. While we do look for a strong leader, we also
obsess over understanding the organizational dynamics and culture. We assess the entire
management team, rather than any individual. After that, we tend to look at the industry and try to
get it reasonably right. Finally, we focus on valuation and look for a margin of safety. If all these
are satisfied, we make a decision to invest.

When we look at an investment, we don’t look for an exit strategy at all. We invest for a lifetime
and we make our returns from cash flows. We focus on the long term because we have capital on
our balance sheet which is permanent in nature. A typical PE firm feels compelled to raise another
fund every three to four years. We don’t have that constraint.

THOMAS COOK

Corporate History

Thomas Cook’s eponymous founder pioneered travel out of Europe in 1872.15 His first destination was
Egypt, where he took people from the United Kingdom on package tours. Over the years, the company
also developed a traveller’s cheque business, which issued cheques to travellers as a more secure option
than carrying cash. By 2012, Thomas Cook Group plc had developed a strong global presence. “The
company operated in 19 markets — Thomas Cook directly or indirectly controlled a number of
subsidiaries with investments in other companies and a fleet of 87 aircraft.”16 The company’s operating
structure comprised four segments: United Kingdom and Ireland, Continental Europe, Northern Europe,
and Airlines Germany. Thomas Cook was one of the world’s leading leisure travel groups, with sales of
£8.9 billion and 22.5 million customers as of May 21, 2012.17

Thomas Cook India’s Beginnings

In the 1860s, Thomas Cook & Son started sending tourists to India on package tours, which marked the
early beginnings of Thomas Cook India Limited (TCIL). TCIL was the largest integrated foreign
exchange and travel services company in India. It had been present since 1881 and had been publicly
traded since 1983.

TCIL offered a broad spectrum of services that included foreign exchange, corporate travel, MICE
(meetings, incentives, conferences and exhibitions), leisure travel, insurance, visa and passport services
and e-business. TCIL’s breadth of products and services, combined with its powerful brand, provided a
“one-stop shop” for all travel requirements and thus offered significant cross-selling opportunities. As of
December 2011, TCIL had 2,728 employees, operated 154 owned stores (including 22 airport branches),
and worked through 110 franchisees and 184 preferred sales agents covering 100 cities. TCIL had been
air-freighting banknotes back to home countries for a century before the creation of the RBI. This early-
mover advantage had allowed it to build scale and volume.

In 2012, TCIL operated in two segments: travel/related services and financial services. Travel/related
services included retail purchases and sales of foreign currencies and paid documents, tour operations,
travel management and travel insurance. Financial services included wholesale purchases and sales of
foreign currencies and paid documents.

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Travel Segment

The company sold 3,000 room nights every summer in Europe without assuming room inventory risk if
they did not sell. It focused on package tours and sold them one year in advance. Package tours included
airline tickets, hotel rooms, shows, etc. TCIL was able to sell a package and collect cash six months
before the travel date and, hence, offer a compelling price. Forty per cent of customers came back for
repeat business.

The airline inventory to the popular tourist destinations (such as the United States, Europe and Southeast
Asia) was a constraint for TCIL, since there were relatively few airlines and therefore a limited supply of
airline seats. As the aviation industry liberalized and more airlines operated in India, TCIL would be able
to buy more airline seats and, in turn, sell more holiday packages.

Culturally, Indians preferred a different holiday experience than Westerners. When Indians went to
Europe or elsewhere, they rarely opted to go to a beach for a relaxing holiday. Rather, they selected a
packed schedule with tour guides and Indian food. After years of experience, TCIL had developed
expertise in the treatment of Indian customers, which had little synergy with Thomas Cook Group plc.
There seemed to be huge upside potential in this business.

Prem Watsa also felt that the travel segment offered great potential in India. He quipped:

You will understand the great growth potential of this company when you realize that currently
only one million Indians annually travel outside India for holidays. This compares to some 40
million outbound tourists in China and hundreds of millions of outbound tourists in the Western
world. Enormous opportunity indeed!

Foreign Exchange Segment

The foreign exchange business appeared to have a very different growth trajectory than the travel
segment, since banknotes had been losing relevance to electronic cash. The world kept moving slowly
away from cash towards electronic means of payment, suggesting that the growth aspect of that business
was capped. TCIL was the only integrated travel and foreign exchange company in the world.

To help counter the trend towards electronic cash, TCIL offered borderless prepaid cards — such
instruments allowed customers to have multiple currencies on one card, which made the hassle of
carrying several different currencies irrelevant.

On the other hand, TCIL’s foreign exchange segment had a privileged position in the bank note business
because it had been in operation prior to the existence of the RBI. Consequently, TCIL had an advantage
in terms of margins on foreign exchange transactions. The segment generated a lot of cash, despite a high
working capital requirement (a high amount of cash had to be kept at locations to meet customer needs).
Since India was a very large absorber of foreign currency banknotes, TCIL had played the role of
physically exporting those banknotes out of India and back to their home countries for many years. The
difference between the number of people coming into India and the number going out was large.
Furthermore, people entering India were buying a huge amount of rupees, while people leaving India
were not buying a huge amount of dollars. Analysts estimated that about $2.5 billion a year of banknotes
were air-freighted out of India with Thomas Cook, accounting for about $2 billion. In fact, Thomas Cook
Group plc operated three flights a night air-freighting banknotes out of India. This scale was very hard to

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replicate and TCIL remained as the only non-banking institution permitted to do this activity (see Exhibit
4).

As a high-volume, low-margin business with a market share in excess of 50 per cent, the wholesale
foreign exchange business produced margins of 54 per cent on net revenue, while keeping gross spreads
at approximately 0.4 per cent. This segment was extremely sensitive to market movements and pricing. At
the same time, the retail segment spreads were four to five times those of the wholesale spreads and were
relatively price-inelastic.

In fact, the two segments showed signs of synergies (see Exhibit 5). Seventy per cent of TCIL travel
customers also bought foreign exchange from the company; they did not shop around for a better rate.
Consequently, Thomas Cook India had pricing power over competitors and charged a 2 to 3 per cent
premium. In addition, the remittance business was a strong growth driver for TCIL. This trend would
most likely continue as Indians moved abroad, and TCIL would benefit significantly since India was the
world’s largest recipient of migrant remittances.

Competition Analysis

There had been a transition in the travel industry in recent times with the emergence of online travel
agents (OTAs). Expedia India, MakeMyTrip India, Cleartrip and Yatra were just a few of the names
present in the space. TCIL had a more traditional bricks-and-mortar (offline) setup and would have to
consider whether to shift its focus to more of an online-based model, given the popularity of OTAs
among youth travellers who had started accumulating disposable income.

At the same time, the offline bricks-and-mortar format of TCIL remained very important to the Indian
market, as TCIL could provide an end-to-end service (flights, hotels, meals, transportation, tour guides
etc.) that OTAs could not. Indian travellers had specific needs such as dietary requirements and a culture
of traveling in large groups, which TCIL’s end-to-end solution could cater to much more effectively.

Deal Background

In 1982, TCIL was listed on India’s National Stock Exchange via an initial public offering, while Thomas
Cook Plc continued to hold a majority stake. As traveller’s cheques declined globally, Thomas Cook Plc
sold that segment globally to Travelex in 1999. In light of regulatory complexities in demerging the
Indian business, the only foreign exchange business that Thomas Cook Plc retained was in India.18 In
2005, the then-CEO decided to exit India and Thomas Cook Plc divested the Indian subsidiary to Dubai
Financial Group for ₹66 per share. Soon after, that CEO was terminated and the new CEO reacquired the
Indian subsidiary for ₹107 per share. Dubai Financial Group made a return of roughly 100 per cent in two
years.

In 2011, the CEO of Thomas Cook Group plc was fired and lending banks pressured the company to sell
assets yet again. Since the Indian business was independently managed and profitable, it became an
obvious candidate to be sold. Additionally, the synergies with the rest of the global business were
becoming less obvious, since TCIL still made substantial profits from foreign exchange.

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Madhavan Menon, the CEO of TCIL, said:

In October 2011, Thomas Cook (India) got an unsolicited offer from Travelex, a large financial
services business based out of London. I told the acting CEO, “Breaking this company will
destroy you. The last thing you and I want is our legacy to say that we are the people who broke it
up.” Furthermore, this wouldn’t work. From a regulatory point of view, changing a business from
an existing one requires a lot of effort in India. Also, the travel business has got a far larger
gestation period than the foreign exchange business. It takes 90 to 120 days between the time
when you do the original sale and the time you book the revenue on it. In foreign exchange, the
person comes up to the counter, you do a transaction and it is done. So, one has a very high
EBITDA [earnings before interest, taxes, depreciation and amortization] margin, while the other
one has a low EBITDA margin.

At the same time, the Indian business was solid, with a well-recognized brand name. However, the issue
remained whether (and for how long) Thomas Cook Group plc would allow the usage of the Thomas
Cook brand name.

In early 2012, Fairbridge identified the opportunity to acquire a controlling stake in TCIL, which at the
time had a market capitalization of $230 million. Fairbridge was well aware that TCIL’s parent, Thomas
Cook Group plc, had come under pressure from its lenders to sell its 77 per cent stake in TCIL in order to
pare down debt. However, there were concerns, especially in regard to the regulatory complexity of the
deal.

Firstly, the deal would have to be approved by the Competition Commission of India, the Foreign
Investment Promotion Board, and the RBI. Secondly, the SEBI guidelines required that Fairfax initially
purchase a 77 per cent stake, make an open offer for an additional 23 per cent stake, and then mandatorily
sell down to the 75 per cent limit within a year. The SEBI guidelines did not permit the acquirer to
directly seek a delisting, even though it was compelled to make an open offer for the 23 per cent not
acquired. So should Fairbridge proceed with the deal, it would be putting extra capital into the deal and
then potentially selling down at a loss.

Analysts estimated the post-tax free cash flow of TCIL to be ₹691 million, and the cash flows for the
financial year ending in 2011 in fact exceeded expectations, coming in at ₹1,164 million. Exhibits 6 to 10
present financial statements and stock price movements of TCIL. Exhibit 11 presents the comparables.

Raghavan and his team had to make several decisions. Did the pros outweigh the cons of investing in
TCIL or was it the other way around? How much should they bid? Was the company worth more with
two segments or should the two segments be demerged? Should Fairbridge be a co-investor with another
party or should it bid for TCIL alone? Should it delist TCIL or keep it public? There seemed to be no easy
answers.

The authors would like to thank Bitan Chakraborty for excellent research assistance, Vikram Kuriyan would like to
thank the Investment laboratory at the Indian School of Business and Emir Hrnjić would like to thank the Centre for
Asset Management Research & Investments and NUS Business School for the donation to this case.

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EXHIBIT 1: US$/₹ EXCHANGE RATE BETWEEN JANUARY 1, 2012 AND MARCH 31, 2012

54
53
52
51
50 Price
49 Average
48
47
46
01/Jan/12 01/Feb/12 01/Mar/12

Source: http://in.investing.com/currencies/usd-inr-historical-data, accessed July 31, 2015.

EXHIBIT 2: FAIRFAX’S GUIDING PRINCIPLES

OBJECTIVES
 We expect to compound our mark-to-market book value per share over the long term by 15 per cent
annually by running Fairfax and its subsidiaries for the long-term benefit of customers, employees and
shareholders — at the expense of short-term profits if necessary.
 Our focus is long-term growth in book value per share and not quarterly earnings. We plan to grow through
internal means as well as through friendly acquisitions.
 We always want to be soundly financed.
 We provide complete disclosure annually to our shareholders.

STRUCTURE
 Our companies are decentralized and run by the presidents except for performance evaluation, succession
planning, acquisitions and financing, which are done by or with Fairfax. Cooperation among companies is
encouraged to the benefit of Fairfax in total.
 Complete and open communication between Fairfax and subsidiaries is an essential requirement at
Fairfax.
 Share ownership and large incentives are encouraged across the Group.
 Fairfax will always be a very small holding company and not an operating company.

VALUES
 Honesty and integrity are essential in all our relationships and will never be compromised.
 We are results oriented — not political.
 We are team players — no “egos.” A confrontational style is not appropriate. We value loyalty — to Fairfax
and our colleagues.
 We are hard-working but not at the expense of our families.
 We always look at opportunities but emphasize downside protection and look for ways to minimize loss of
capital.
 We are entrepreneurial. We encourage calculated risk taking. It is all right to fail but we should learn from
our mistakes.
 We will never bet the company on any project or acquisition.
 We believe in having fun — at work!

Source: “Guiding Principles,” Fairfax, www.fairfax.ca/Corporate/guiding-principles/default.aspx, accessed September 3,

2014.

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EXHIBIT 3: FAIRBRIDGE CAPITAL’S INVESTMENT PRINCIPLES

 Investment amounts between $20 million and $200 million.

 Buyout and growth capital transactions, but always friendly with full support of management.
 Public and private equity transactions.
 Capital structure agnostic; allowing participation in equity, quasi-equity and mezzanine debt.
 Sector agnostic; allowing investment across domestic consumption-oriented as well as export-competitive
sectors.
 Track record; investments in cash flow generating businesses with proven track records across business
cycles.
 Partnership; investments in stable management teams who fit with and follow our guiding principles.

Fairbridge will not generally consider deals of the following nature:

 Early-stage or pre-revenue companies, especially where there is technology or market adoption risk.
 Loss-making businesses in need of major operational restructurings.
 Unfriendly or hostile deals involving an active role in day-to-day management.

Source: “Investment Criteria,” Fairbridge, www.fairbridgecapital.com/investment_criteria.html, accessed June 30, 2015.

EXHIBIT 4: FOREIGN EXCHANGE OPERATIONAL OVERVIEW

Source: “Investor Presentation,” Thomas Cook India, May 2012,

www.thomascook.in/tcportal/downloads/InvestorPresentation.pdf, p. 9, accessed September 26, 2014.

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EXHIBIT 5: SYNERGIES

Source: “Investor Presentation,” Thomas Cook India, May 2012,

www.thomascook.in/tcportal/downloads/InvestorPresentation.pdf, p. 4, accessed September 26, 2014.

EXHIBIT 6: ANNUAL INCOME STATEMENT OF TCIL, 2001–2011

For the 12-Month Oct. Oct. Oct. Oct. Oct. Dec. Dec. Dec. Dec. Dec. Dec.
Period Ended 31 31 31 31 31 31 31 31 31 31 31
₹ in Million 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Revenue 900 1,026 1,108 1,322 1,309 1,795 2,851 3,100 2,782 3,302 3,927
Cost of Goods Sold (318) (351) (371) (436) (450) (572) (1,069) (1,261) (1,031) (1,278) (1,545)
Gross Profit 581 674 737 886 859 1,223 1,781 1,839 1,751 2,024 2,382

Operating Expenses (321) (298) (353) (401) (361) (608) (778) (878) (883) (1,091) (1,205)
EBITDA 261 376 385 484 498 615 1,004 960 868 933 1,177
Depreciation & Amort. (57) (55) (46) (58) (68) (99) (88) (111) (116) (135) (139)
Finance Cost (Net) (13) (20) (1) 6 7 (36) (272) (297) (210) (217) (231)

Non-recurring Item 4 9 5 8 6 8 12 47 (137) 156 -

Profit Before Tax 194 310 343 440 442 489 656 599 405 737 807
Income Tax Expense (89) (111) (125) (159) (157) (178) (137) (226) (155) (265) (244)
Net Income 106 199 218 282 285 311 519 373 250 472 563
Margin Indicators
Gross Profit Margin (%) 65 66 67 67 66 68 62 59 63 61 61
EBITDA Margin (%) 29 37 35 37 38 34 35 31 31 28 30
Net Income Margin (%) 12 19 20 21 22 17 18 12 9 14 14
Growth Indicators
Revenue Growth (%) N/A 14 8 19 -1 37 59 9 -10 19 19
Gross Profit Growth (%) N/A 16 9 20 -3 42 46 3 -5 16 18
EBITDA Growth (%) N/A 44 2 26 3 23 63 -4 -10 7 26
Net Income Growth (%) N/A 88 10 29 1 9 67 -28 -33 89 19
Average Annual
Conversion Rate (₹/$) 47 48 47 45 44 45 41 44 48 46 47

Source: Annual reports.

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 Page 12 9B15N016

EXHIBIT 7: QUARTERLY INCOME STATEMENT OF TCIL

2009 2010 2011

For the
Mar. Jun. Oct. Dec. Mar. Jun. Dec. Dec. Mar. Jun. Oct. Dec.
Quarter
31 30 31 31 31 30 31 31 31 30 31 31
Ended
₹ in Million
Revenue 672 747 743 620 725 886 1,019 672 884 1,075 1,081 887
Cost of
Goods Sold (270) (280) (272) (209) (295) (344) (328) (312) (398) (406) (351) (391)
Gross
Profit 402 467 471 410 431 542 691 360 486 669 731 497

Operating
Expenses (230) (221) (188) (243) (262) (262) (279) (289) (319) (262) (263) (362)
EBITDA 173 246 283 167 169 280 413 72 167 406 468 135

Depreciation
& Amort. (28) (28) (30) (30) (30) (34) (35) (36) (32) (33) (35) (39)
Finance
Cost (Net) (82) (47) (38) (43) (50) (44) (57) (66) (62) (48) (65) (56)
Non-
recurring
Item - - - (137) - - - 156 - - - -
Profit
Before Tax 63 170 215 (43) 88 202 320 126 73 326 367 40

Income Tax
Expense (10) (50) (66) (29) (45) (104) (128) 13 (26) (111) (117) 10
Net Income 52 121 149 (72) 43 97 192 139 47 215 250 50

Source: Quarterly filings.

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 Page 13 9B15N016

EXHIBIT 8: BALANCE SHEET OF THOMAS COOK INDIA, 2001–2011

Oct. Oct. Oct. Oct. Dec. Dec. Dec. Dec. Dec. Dec.
Balance Sheet as on 31 31 31 31 31 31 31 31 31 31
₹ in Million 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
EQUITY &
LIABILITIES
Common Stock 146 146 146 146 146 161 161 211 212 212
Securities Premium - - - - - - - 1,620 1,635 1,635
Preference Share
Capital - - - - - 1,039 1,056 6 6 6
Reserves and Surplus 927 1,082 1,300 1,523 1,443 755 1,022 1,182 1,555 2,071
Total Common Equity 1,072 1,228 1,446 1,668 1,589 1,955 2,239 3,020 3,407 3,923
Secured Loans 112 4 154 2 61 25 4 8 24 24
Unsecured Loans 131 - - - 2,463 2,832 2,600 1,692 1,992 2,262
Deferred Tax Liability 50 47 51 54 47 25 14 29 76 50
Total Liabilities and
Equity 1,365 1,279 1,650 1,725 4,161 4,837 4,858 4,749 5,499 6,259
ASSETS
Gross Property, Plant &
Equipment 734 797 896 947 1,312 1,382 1,415 1,503 1,857 2,013
Accumulated
Depreciation (281) (317) (355) (391) (627) (664) (713) (766) (837) (977)
Net Property, Plant &
Equipment 453 481 541 556 685 718 702 737 1,021 1,037
Long-term Investments 2 49 6 141 125 7 2 36 36 43
Goodwill - - - - 1,454 1,454 1,454 1,454 1,454 1,454
Cash & Bank Balances 691 683 984 932 1,917 1,724 1,819 1,821 1,721 3,075
Accounts Receivables 487 481 735 819 1,902 1,988 1,525 2,071 2,225 2,266
Other Current Assets 267 318 297 371 535 915 1,069 1,087 1,439 1,334
Total Current Assets 1,444 1,482 2,017 2,122 4,354 4,627 4,412 4,979 5,385 6,675
(Less) Current
Liabilities (534) (732) (913) (1,096) (2,457) (1,969) (1,713) (2,457) (2,397) (2,950)
Net Working Capital 910 750 1,104 1,027 1,897 2,658 2,699 2,522 2,988 3,725
Total Assets 1,365 1,279 1,650 1,725 4,161 4,837 4,858 4,749 5,499 6,259
Key Ratios
ROCE (%) 24 26 26 25 12 19 17 16 15 17
ROCE (without
Goodwill (%) 24 26 26 25 19 27 25 23 20 22
ROE (%) 19 18 19 17 20 27 17 8 14 14
Turnover Ratios (no.)
Debtor Days 173 158 203 228 387 255 180 272 246 211
Creditor Days 146 163 125 136 363 116 120 145 172 178
Net Working Capital
Cycle 28 (4) 78 92 24 139 60 127 74 33
No. of Shares 146 146 146 146 146 161 161 211 212 212
Year End Conversion
Rate (₹/$) 48 45 46 45 45 39 49 47 45 53

Note: ROCE = return on capital employed; ROE = return on equity.

Source: Annual reports.

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 Page 14 9B15N016

EXHIBIT 9: CASH FLOW STATEMENT OF TCIL, 2001–2011

For the 12-Month Oct. Oct. Oct. Oct. Oct. Dec. Dec. Dec. Dec. Dec. Dec.
Period Ended 31 31 31 31 31 31 31 31 31 31 31
Rs. in Million 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Net Income 106 199 218 282 285 311 519 373 250 472 563
Depreciation & Amort. 57 55 46 58 68 99 88 111 116 135 139
Other Operating
Activities 90 (10) 9 (43) (10) 164 (18) 295 12 9 53
Increase/(Decrease) in
Acc. Receivable 253 (127) (47) (195) (155) (905) (209) 363 (549) (297) 43
(Increase)/Decrease in
Acc. Payable (267) 138 112 179 179 873 (505) (234) 757 (13) 548
Cash from Operations 239 255 338 281 368 542 (125) 908 586 306 1,346
Capital Expenditure (Net) (58) (52) (75) (117) (82) (109) (101) (77) (174) (241) (182)
Cash Acquisitions - - - - - (1,658) (12) - - - -
Other Investing Activities 20 (0) (46) 49 (121) 50 134 11 22 20 19
Cash from Investments (38) (52) (121) (68) (203) (1,717) 21 (66) (152) (221) (163)
Incr./(Decr.) in Debt, Net
of Payments (347) (12) (177) 350 (51) 2,332 777 (551) (355) (288) 331
Issuance of Common
and/or Pref. Stock - - - - - - - 17 621 - -
Common and/or Pref.
Dividends Paid (58) (41) (48) (55) (55) (43) (85) (128) (94) (93) (93)
Other Financing Activities - - - (7) (7) (7) (338) (385) (47) (407) (7)
Cash from Financing (405) (53) (225) 288 (113) 2,282 355 (1,046) 125 (788) 231
Net
Increase/(Decrease) in
Cash (203) 150 (9) 501 51 1,106 251 (204) 560 (703) 1,414
Average Annual
Conversion Rate (₹/$) 47 48 47 45 44 45 41 44 48 46 47

Source: Annual reports.

EXHIBIT 10: KEY FINANCIALS OF THOMAS COOK INDIA, 2008–2011

2008 2009 2010 2011

Revenues (in ₹ million) 2,588 2,247 2,792 3,491
Profit After Tax (in ₹ million) 302 222 415 559
Net Profit Margin (%) 12.1 9.09 15.49 16.78
ROCE (%) 18.06 11.18 12.5 15.31
Debt to Equity Ratio 3.95 0.62 0.65 0.65
Interest Coverage Ratio 2.74 3.3 4.16 4.47
Earnings per Share (Basic) in ₹  1.78 1.06 1.96 2.64
per Share
Earnings per Share (Diluted) in 1.72 1.03 1.91 2.57
₹ per Share

Source: e-Eighteen.com Ltd, www.moneycontrol.com/financials/thomascook/balance-sheet/TCI, accessed October 6, 2015.

This document is authorized for use only in Prof. Soumya Guha Deb's IIM Sambalpur/ Term IV/2021-22/Financial Services (PEVC & FS) at Indian Institute of Management - Sambalpur from
Jun 2021 to Nov 2021.
 Page 15 9B15N016

EXHIBIT 11: VALUATION COMPARABLES

Indian Comparable Companies
Net EBITDA Net In-
Sales Margin come
Share
Market LTM Margin EV/EBI ROE
EV Price 52w LTM P/E P/BV
Cap (%) (%) TDA (%)
(₹)
Company Name 6-
6-Mar. 6-Mar. High/ 31-Dec. 31-Dec.
Mar. LTM LTM LTM LTM LTM
12 12 Low 11 11
12
31- 31- 31- 31-
US$ US$ US$ 31-Dec.
₹ ₹ US$ Mn Dec. Dec. Dec. Dec.
Mn Mn Mn 11
11 11 11 11
Thomas Cook India
212 203 50 66/32 84 30 14 8.1x 17.7x 2.7x 15
Limited*
248/
Cox and Kings 476 628 174 147 29 14 14.9x 23.0x 1.9x 8
153
415/
Club Mahindra Holidays 474 447 283 81 31 20 17.9x 29.6x 4.7x 16
266
219/
International Travel House 28 25 178 24 23 13 4.5x 9.4x 1.6x 17
155
Weizmann Forex 40 45 174 97/39 559 1 0 9.5x 20.2x 4.5x 22
Mean 23 12 11.0x 20.0x 3.1x 16
Median 29 14 9.5x 20.2x 2.7x 16
Global Comparable
Companies
4.00/
TUI Travel PLC (LSE: TT) 3,393 3,462 3.06 23,483 3 1 5.5x 24.3x 1.1x 5
2.10
Flight Centre Ltd. (ASX: 25.40/
2,332 1,661 23.32 1,970 15 8 5.8x 14.5x 2.8x 19
FLT) 17.00
Kuoni Reisen Holding AG 493.1/
1,245 1,128 322.55 5,220 3 0 7.2x 48.4x 1.7x 4
(SWX: KUNN) ** 233.3
Shenzhen Tempus Global
320 232 2.68 2.9/2.6 29 41 33 19.5x 34.1x 2.0x 6
Travel (SZSE: 300178)
Thomas Cook Group plc
313 866 0.36 3.1/0.1 15,499 4 -5 1.3x NMF .2x NMF
(LSE: TCG) **
Jetset Travelworld Ltd. 1.00/
290 141 0.66 401 13 8 2.8x 9.4x .6x 7
(ASX: JET) 0.64
Transat AT Inc. 20.1/
260 85 6.82 3,684 1 0 2.4x NMF .6x NMF
(TSX:TRZ.B) ** 5.6
Mean 11 6 6.3x 26.1x 1.3x 8
Median 4 1 5.5x 24.3x 1.1x 6
Blended Mean 16 9 8.3x 23.1x 2.1x 12
Blended Median 14 8 6.5x 21.6x 1.8x 12

Note:
* Represents Fairbridge’s acquisition price.
** LTM Financial Information (Kuoni - September 30, 2011; Thomas Cook Group plc - September. 30, 2011; Transat -
October 31, 2011).
NMF: Not meaningful; EV: enterprise value; P/BV: price to book value ratio; LTM: last 12 months.
Source: Created by authors based on data collected from Capital IQ.

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 Page 16 9B15N016

ENDNOTES

1
“Investor Presentation,” Thomas Cook India, March 2013, www.thomascook.in/tcportal/downloads/TCILInvestor
Presentation_Feb_2013.pdf, p. 9, accessed September 25, 2014; ₹=INR=Indian rupee; average ₹/US$ exchange rate for
the first quarter of 2012 stood at ₹50.22/$1, http://in.investing.com/currencies/usd-inr-historical-data, accessed July 31,
2015.
2
Fairfax Financial Holdings Limited, “Annual Reports (1990 to 2014),” www.fairfax.ca/Investors/financial-reports-and-
filings/financial-reports-and-filings/1990/default.aspx, accessed August 22, 2014.
3
Other partners were Tony Hamblin, Roger Lace, Brian Bradstreet and Frances Burke.
4
All $ amounts are in US$.
5
Fairfax Financial Holdings Limited, “Fairfax’s 28-year Track Record,” www.fairfax.ca/files/Acquisitions%20Track%20
Record%20March%202014.pdf, accessed September 25, 2014.
6
Fairfax Financial Holdings Limited, “Annual Report 2011,” www.fairfax.ca/files/Annual%20Report%202011%
20Final_v001_j20lz3.pdf, accessed September 28, 2015, pp. 2–3.
7
Ibid., p. 13.
8
People, “Canada’s Warren Buffett, Who Wants to Buy BlackBerry,” NDTV, September 24, 2013,
www.ndtv.com/article/people/prem-watsa-canada-s-warren-buffett-who-wants-to-buy-blackberry-422895, accessed August
22, 2014.
9
Fairfax Financial Holdings Limited, “Annual Report 2007,” www.fairfax.ca/files/doc_financials/AR2007.pdf, accessed
September 28, 2015, pp. 4–5.
10
Ibid., p. 60.
11
Fairfax Financial Holdings Limited, “Annual Report 2002,” www.fairfax.ca/files/doc_financials/AR2002.pdf, accessed
September 29, 2015, p. 4.
12
Fairfax Financial Holdings Limited, “Annual Report 2010,” www.fairfax.ca/files/doc_financials/AR2010.pdf, accessed
September 29, 2015, p. 4.
13
T. Kiladze, “Fairfax’s Prem Watsa Sees Commodity Bubble Brewing,” The Globe and Mail, December 2, 2010,
www.theglobeandmail.com/globe-investor/fairfaxs-prem-watsa-sees-commodity-bubble-brewing/article1317635, accessed
August 28, 2014.
14
www.outlookbusiness.com/printarticle.aspx?284049, accessed September 25, 2014.
15
Thomas Cook Group, “Thomas Cook History,” https://www.thomascook.com/thomas-cook-history/, accessed August 2,
2015.
16
Google, “Thomas Cook Group plc,” Google Finance, www.google.co.uk/finance?cid=716892, accessed September 26,
2014.
17
Thomas Cook Press Office, “News Release,” www.thomascook.in/tcportal/press12/Q2ResultsJuly272012.pdf, accessed
September 26, 2014.
18
D. Das and B. Kalesh, “Thomas Cook Taps Travelex to Sell Forex Unit,” The Financial Express, October 20, 2011,
www.financialexpress.com/news/thomas-cook-taps-travelex-to-sell-forex-unit/862504, accessed September 26, 2014;
Thomas Cook Group, “Key Dates,” www.thomascook.com/about-us/thomas-cook-history/key-dates, accessed September
26, 2014.

This document is authorized for use only in Prof. Soumya Guha Deb's IIM Sambalpur/ Term IV/2021-22/Financial Services (PEVC & FS) at Indian Institute of Management - Sambalpur from
Jun 2021 to Nov 2021.