Large players dominate the mainstream travel market, yet luxury and specialist travel is highly fragmented. Western & Oriental plans to grow by acquiring luxury travel businesses, then growing them through cross-selling.

David Howell, previously finance director of lastminute.com and before that First Choice, is chairman of Western & Oriental (W&O). He went into lastminute.com and sorted out its finances and gained experience of making acquisitions both there and at First Choice.

Howell joined W&O in December and has been responsible for pushing ahead the acquisition strategy. Nearly one-third of the 1,000-plus ABTA tour operators are luxury or specialist and some make operating margins of more than ten per cent.

W&O joined AIM in March with a placing at 22p raising £4.2 million, slightly below the originally mooted £5 million, with a strategy of acquiring businesses for a combination of cash and shares, meaning the potential spending power is twice the cash figure.

W&O generally pays a pre-tax multiple of four to six times (the initial payment is supplemented by an earn-out) and multiples don’t take into account any cross-selling or back-office integration benefits. W&O also looks to improve the online presence of businesses it buys.

W&O has been built up over the past four years, although its Regent Holidays subsidiary, offering city breaks and tours to emerging markets, Iceland and Russia, has been operating since 1970. Other subsidiaries specialise in India, Africa, the Caribbean and the Mediterranean.

At flotation, W&O acquired two additional businesses – Lynton Cooper for up to £1.6 million and Ranch America for up to £400,000. Lynton Cooper is the largest acquisition to date and is one of the group’s longest established brands. The upmarket ski holidays venture turns over £11 million and makes profits of £70,000, whilst Ranch America offers ‘dude ranch’ holidays and makes profits of £70,000 on turnover of £1 million. Moving into W&O’s offices will save £50,000.

The most recent acquisition is Travel Management Team (TMT), costing £333,000 in cash and shares. Additional deferred consideration of up to £250,000 is payable depending on performance in the year to June 2007. TMT organises UK and overseas conferences and hospitality for corporate customers, including HBoS and Lex, and provides a good fit with the part of Lynton Cooper that is in the corporate sector.

Profits of £2m?

Evolution Securities has yet to publish profit forecasts, though the house broker believes the acquisition strategy is on target to produce annualised profits of £2 million by September and has set a price target of 37p for the 19.5p shares. The market will want to see concrete figures demonstrating strategic success before the price hits
that figure.

Interims to March bore little relation to the ongoing business, with the two companies acquired in March only included for one month and accounting for the majority of ongoing annualised turnover, currently running in excess of £20 million.

W&O has tax losses of £2 million but there is nothing included in the balance sheet for this deferred tax asset. And if things go to plan acquisitions will contribute enough profits to use these up in the next year or two. The group also closed March with net cash of £7 million, anomalous given its market price tag of £8.1 million. That cash may be boosted somewhat by money paid for holidays but W&O certainly still has most of the £4.2 million raised at float and though it may not make much, if any, profit this financial year, it should move into profit next year thanks to acquisitions. Though there’s cash in the bank and the strategy is on course, the shares are trading below their original flotation price and are worth buying at current levels.

Western & Oriental	AIM	£8.25m	3.62p	0.00p
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