By conventional valuation metrics, Thomas Cook’s buy of Sterling Holiday Resorts seems to have come quite costly.

Consider this. At ₹870 crore, Sterling Holiday has been valued at 7.7 times its trailing 12-month revenues. This is almost thrice the market-capitalisation-to-revenue ratio of bigger rival Mahindra Holidays.

Also, Mahindra Holidays has been profitable for many years now. In contrast, Sterling, after a long time, posted net profit only in the latest June quarter. Even in the latest December quarter, the company, while managing profit at the operating level, remained in the red at the net level. So, what may have made Thomas Cook pay top dollar?

It seems to be betting on Sterling’s turnaround picking pace. Indeed, after Bay Capital came in as an investor in 2009 and Ramesh Ramanathan began running the operations again, Sterling has increased occupancy levels, grown revenues and pared losses and debt.

Thomas Cook may be able to accelerate the turnaround by diverting its travel and holiday customers to Sterling’s resorts.

For Thomas Cook, this acquisition is a vertical integration of sorts and may help position itself as a more comprehensive service provider. At present, almost half of Sterling’s revenues come from non-members while the other half is from vacation ownership (time share) members.

Its clientele may be able to add to the non-member revenues at Sterling’s 19 resorts and increase occupancy levels.

This, along with paying off the balance debt with the fresh funds, may eventually help Sterling post profits consistently.

Thomas Cook could also benefit from Sterling's 15 land parcels (150 acres), where resorts can be built in the future.

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