TUI - severe management mistakes

If one wonders about the poor performance of the former German conglomerate Preussag now named TUI AG the reasons seem clear.

Condensed to one word, the company suffers under severe mismanagement.


Clearly visible in the development of TUI's stock price the decisions of the past have left their mark.
One example of this fatal decisions is the acquisition of the Canadian shipping line CP Ships in August 2005.

For a record price of 1.7 billion Euro, TUI's CEO Michael Frenzel paid 60% more per TEU than Maersk Sealand for P&O Nedlloyd in the same year.

But in contrast to Maersk Sealand TUI didn't neither have a focus on container shipping nor the necessary reserves to weather a industry downturn.
Since the container shipping industry experienced a severe retreat from the frenzy in late 2005 the acquisition remains under fire.

So Mr. Frenzel "Daddy Deal" took measures to protect his employment. To make sure that the drag from the container shipping segment within TUI remains manageable he merged the tourist segment with the British company First Choice.
This way he has created himself a currency for further deals yet to come as he is able to sell shares of the newly created TUI Travel PLC.

Meanwhile the valuation of the German parent TUI AG seems stretched. With a stake of 40-45% (ca. 1.7 bn Euro) of TUI Travel PLC remaining, the current stock price puts the value of the Hapag-Lloyd subsidiary at about 2 billion Euro.
Very lofty for a shipping line with about 6 billion Euro revenue that is currently amassing losses.

With the US economy in free fall and major Asian economies like the bellwether Singapore sharply weakening the prospects for global trade look gloomy.
Adding to this a flood of brand-new container ships is circulating in the industry, always seeking capacity to fill.

This will inevitably lead to falling freight rates. And the longer the current economic weakness around the world persists the more pressure will build up at weak companies like Hapag-Lloyd and his parent TUI.

The end of the story could be that - as history has proved so often - such players are wiped out exactly at the turning point of the cycle.

So far, we are nowhere near the bottom.