Earlier this week Ord Minnett upgraded Smallcap wholesaler/retailer of RVs, motorhomes, campervans and caravans, Apollo Tourism & Leisure (ASX: ATL) to Buy from Hold, with the target price of $0.77 representing a 16% upside the current price ($0.66).
The share price jumped from $0.555 on 9 December to $0.70 the following day on news of a proposed all-scrip merger with global tourism operator, and Kiwi-listed company Tourism Holdings (NZX: THL).
Assuming the deal proceeds, Apollo shareholders will receive 1 Tourism Holdings share for every 3.68 Apollo shares they own. This represented an 18.9% premium on the 1-month volume-weighted average price for each company’s stock for the same date.
Ord Minnett's believes the proposed merger offers benefit to all shareholders and gives Apollo’s shareholders an opportunity to hold a stake in a much larger business.
Management expects the combined entities to create a diversified travel company serving Australia, NZ, North America, the UK, and Europe.
Post-merger, Apollo shareholders will be left with a 25% ownership of Tourism Holdings.
However, while Ord Minnett doesn’t expect the deal to encounter insurmountable ACCC, Australian Foreign Investment Review Board (AFRRB), legal or shareholder hurdles the broker suspects the current share price reflects market uncertainty over the merger actually proceeding.
While Apollo expects to complete the merger by the end of this financial year, it’s also important to note that it is subject to Tourism Holdings being able to list on the ASX.
Meantime, the company’s founders, the Trouchet family, who control around 53% of Apollo’s shares plan to vote in favour of the merger and have also volunteered to put 90% of Tourism Holdings shares they receive in escrow for at least a year.
Apollo managing director, Luke Trouchet expects the proposed merger to provide a better platform for operations with like-minded cultures to better meet the ongoing impacts of covid.
While Trouchet refused to provide earnings guidance due to the uncertainty of the trading environment, he noted, the combined business will “be better able to capitalise on near-term growth opportunities as borders re-open and cross-border tourism begins to return to pre-pandemic levels.”
Apollo expects the merger to incur one-off implementation costs of between $3.8m and $6.7m.
But based on Apollo’s numbers, cost synergies will bring an earnings boost of between approximately $16.2m and $18.1m annually. It’s understood around two thirds of these synergies are fixed costs relating to the duplication of corporate costs or properties.
Then there’s an expected fleet rationalisation of about 1,250 vehicles, which should bring a net debt benefit of more than $38m. While subject to operational efficiency improvements, there’s also a one-off debt reduction worth around $28.5m.
Based on earnings to date in FY22, the Apollo board is confident of improved results versus FY21, however, an underlying loss is still anticipated.
The board also noted the merger will place it in a better position to restart its dividend payments.
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