Monday, February 10, 2014

Arbitrage Opprtunity in Sterling Holiday Resorts ?

On 8th Feb, 2013, Thomas Cook and Sterling Holiday Resorts announced a merger.

The Structure of the deal is  (Here), (Here)
a) Thomas Cook will buy shares from promoters and some FII @ Rs 98/-.
b) Thomas Cook will also subscribe to preferential allotment @ 90/-
c) Thomas Cook will also make open offer to minority shareholders to the tune of 26% @ Rs 98/-

After the Closure of open offer, Sterling Holiday Resort will be merged in Thomas Cook in the ration of 120 sh of Thomas Cook for every 100 shares of Sterling Holiday Resorts.

The CMP of Thomas Cook is Rs  83.50/- and CMP of Sterling Holiday is Rs 93.20/-.

The Theoretical acceptance ration is 50.80%,  But almost 15.58% (Post Preferential Allotment(Current20.30 %)) of Stake will be held by Ace Investors of India (Damani and Jhunjhunwala and such).

The Practical acceptance ratio should be more than 65%, and If Ace Investors choose to become shareholders of Thomas cook, The acceptance ration can be more than 90 %.

Sterling Holidays

Also the conversion rate of Thomas Cook from Sterling Holiday comes to Rs 77.70/-.

How can I do arbitrage :

1) If I am holding the shares of Thomas Cook and you intend to be a long term Investor then, You can directly sell shares of Thomas Cook and Buy Sterling Holidays, Based on merger Ratio.

2) I can buy shares of Sterling Holiday (Cmp Rs 93.20/-), Sell shares in Open Offer (@ 65% acceptance), The Cost of residual shares of Sterling Holiday would be Rs 84.30. Therefore the conversion rate of Thomas Cook, Post Open Offer would be Rs 70.25.

Also there is an inbuilt call option, Because if the rate of Thomas Cook goes up before the date of open Offer, The Price of Sterling Holiday may go up because of merger ratio.

It will also be interesting to see, how ace investors takes the offer ? More money can be made, if they believe in Thomas Cook and opt for Merger.

Also there is a probability, that price of Thomas Cook may fall, Please refer the valuation discussed by Respected Prof Sanjay Bakshi (Here)

What are the impediments in the deal and How much time it would take ?

a) The deal needs nod from Shareholders and also Minority Shareholder. (Not unlikely that It will be blocked)

b) The companies may need permission from CCI (No issue as such)

c) The Companies may need permission from Stake holder and SEBI which is not an issue. No permission is required from FIPB or  CCEA as the open offer is from Indian Subsidiary.

d) The timeline for open offer would be around 75 day to 90 days, and the merger may take more than 6 months.

I believe buying shares of Sterling Holidays will give handsome returns. 

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.

PS : I intend taking position in the stock


  1. The Sterling holidays stock seems to be stuck around Rs 100 even when Thomas Cook keeps moving higher. I am surprised why is the market not recognizing this opportunity. The merger might take a year to complete as they need to get all the necessary approvals from the respective courts and other regulatory bodies, but this should not be a roadblock?

    Are we missing anything over here?

  2. Hi Gaurav,

    You are right the merger will 6 - 8 months to fruitify. The price of Thomas is not reflected in the price of Sterling Holidays, The Reasons I believe is

    that there is supply coming from some large shareholder, who are exiting from Sterling holidays, But understand the committed buyer on the counter is Thomas cook.

    Also, There can be apprehensions on valuation of Thomas Cook, Will it be able to sustain till merger.

    The solace I am looking is Thomas Cook is good buy at Rs 80/- and My downside is capped till the open offer is over.

    I dont think there will be issues with SEBI or CCI. FIPB may not come into play.



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