– Kuoni Reisen Holding AG (KUNN SW): After Bloomberg reported yesterday afternoon that according to people familiar with the matter, EQT Partners has emerged as a strong contender among other financial investors to take Kuoni private, Kuoni confirmed this morning it has received preliminary approaches from third parties regarding a potential offer for the Kuoni Group and its businesses. These statements/rumours follow Nov-15 news that Kuoni had appointed a new CEO and mid-Dec Swiss reports that it had hired Credit Suisse and Morgan Stanley to examine options for the group and find potential buyers for any of the 3 group units.

Kuoni currently consists of 3 units: i) Global Travel Distribution (GTD) which is a travel distributor that provides travel companies with  access to hotel accommodation and destination services. (CHF 2bn in revenues; low single digit margins; small single digit revenue growth; peers: Expedia/Orbitz); ii) Global Travel Services (GTS) sources and coordinates destination services – from accommodation, transportation, tours and activities to venues and event management. (CHF 1bn in revenues; loss-making; high single digit revenue decline; peers: Thomas Cook Group/TUI Travel); and iii) VFS Global, the industry pioneer and world’s leading visa services provider, works for 48 governments, operates 1,837 application centres in 122 countries and holds an estimated 50% market share of the global outsourced applications market. (CHF 300m in revenues; 15-20% margins; high double digit revenue growth; no real peers).

Although we appreciate that Kuoni’s share price has run up almost 24% from CHF 232 to CHF 289 levels (vs Swiss SMI index up about 2%) since mid-Dec-15 break-up/sale reports and that any serious interest could be only for 1 or 2 units (most likely including the VFS crown jewel) rather than for full company, we like the situation as a) the auction process looks very serious with multiple tier 1 PE parties involved; b) highly attractive PE dynamics for Kuoni’s assets (albeit mainly related to the structurally growing/high margin/high market share characteristics of VFS unit); c) easier to execute a full sale with relatively new CEO and recent proposal to eliminate Kuoni’s voting-rights limit. 

Assuming zero value for GTS, 2015 EBITDA multiple of about 8x for GTD (peers like Expedia trade at much higher multiples), and respective 10x and 12x multiple for the sticky VFS business (contact us for more detailed calculation), we obtain respective target pricing of CHF 285 and CHF 321, and as such, we would initiate position in (low) CHF 280s. Downside CHF 235-245. Upside: CHF 290-340.