Merit goes global
Deal with H.I.S. Co. paves way for investment in growth
In the first of a three-part series on Merit Travel, CTP’s executive editor sits down with Michael (r) and Jason Merrithew (l) (pictured with Louise de Grandpré) to unravel some of the intricacies of the company’s recent deal with Japan’s H.I.S. Co. and where it’s taking the Canadian travel firm.
Welcome to the future!
While there’s no sign with that message actually hanging outside Merit Travel’s offices these days, there probably should be, as the mood emanating from the company’s Toronto headquarters – following its blockbuster deal with Japan’s H.I.S. Co. Ltd. – is on the turbo-charged side of upbeat.
During a recent interview with Canadian Travel Press, it was abundantly clear that both Merit Travel Group’s founder, Michael Merrithew and the president of Merit Travel’s leisure brands, Jason Merrithew have been fully energized by the company’s bright prospects for the future.
“We’ve formed a NewCo Investment Company with H.I.S. Co. in Japan, and we hold a 10.1% equity stake – and that’s indefinitely – [H.I.S.] owns 89.9% and Merit Travel is part of that NewCo,” Michael Merrithew stated when asked to offer additional details on the deal.
“The reason that we structured it the way that we did was to lock in the enterprise value of Merit Travel, but the objective of the NewCo was to significantly invest in growth – through acquisitions in particular – [which would be] funded by H.I.S., not funded by Merit,” he said.
Clearly for Merit Travel, it was a deal that was all about the future, with Merrithew telling CTP: “While we’ve had pretty good growth – some would say outstanding growth, others would say not as good as we could have – we’ve achieved, I believe, pretty good growth results over the last 25 years. We’ve come from a business with about $1 million in annual sales to a business with well in excess of $300 million in [annual] sales over that 25-year period.”
That said, he pointed out: “The internal debate among the shareholders – the stakeholders, I will say, not just the owners of the business, but the stakeholders of the business which includes some of our key managers – was, ‘Okay, now what? Can you just carry on the way you’ve been going or do you really need to look at alternative strategies.’ And we as family, of course, want to look at where do we want to be, going forward.”
As Merrithew sees it: “We’ve invested a lot in this business and this industry over the last 25 years, and I’ve always believed, and continue to believe, that growth – and in particular, profitable growth – is a big part of what this industry demands.”
Which raises the obvious question – So how do you grow? And just as importantly, who provides the investment and how is that investment provided to achieve that growth?
Said Merrithew: “We’ve seen a whole bunch of different models emerge over the years. We’ve seen some of our peers in the industry grow through purely acquisition – and we’ve done a lot of that. And we have funded those acquisitions from our own resources. We’ve reinvested earnings and we fund acquisitions and we grow our business.”
He continued: “Others have brought in third-party investors, again to do acquisitions or to invest in growth through marketing, business development, whatever the case might be. We actually believe that the scope of the growth that we needed to do in taking the business to the next level had to be growth not just within Canada, but had to be part of a global strategy. This is where the industry has gone and continues to go.”
Merrithew told CTP: “We can’t pretend that just because we’re a Canadian-based distribution business – retail, wholesale, travel agency business – that we can take our business to the next level by sort of thinking in the context of just Canada.”
And he admitted that: “We could have carried on that way, with a growth strategy through acquisitions funded by the business, funded by the family in Canada. And we could have enjoyed growth, maybe a few hundred million dollars over the next several years. But then what? You still haven’t achieved the objective which is where we think an industry player needs to be today, which is global.”
The upshot of all this, said Merrithew is that: “We started talking to some American firms. We started talking to some firms based in Europe. We started talking to H.I.S in Japan. We really have hit all the continents – North America, Europe, Asia.”
In those conversations, he said: “We’ve even looked at it in verticals – corporate travel focus, leisure travel focus, loyalty travel focus – [because] maybe the partnerships need to be different by vertical, so that maybe the kind of alliance or partnership or however you want to define it is different for loyalty than it is for corporate. Maybe there are different players.”
“Ultimately,” Merrithew said “it was a two and a half year journey, and we learned a lot along the way. We learned a lot about being, shall we say, in a position of evaluating other partners, but also recognizing that ultimately, those partners would be companies or organizations with a lot deeper pockets and more resources than we either had or were prepared to invest in the expansion of the business going forward.”
Merit’s founder told CTP that the company could have continued to expand its business in Canada, but: “The level of investment that is required to take [a company] to $1 billion; to $2 billion; to $5 billion plus is really restricted today to a smaller group of industry players, global industry players – some public, some still private – but the scale of investment is substantial.”
“What that means, by definition, is that as much as you would like to be in charge, you are accepting, if you will, of the fact that the trade-off is how do we become part of a global player in a global industry, while not trying to overreach our investment capabilities,” he said.
The result, is that Merit – after talking to a number of different firms – ended up going back to H.I.S.
“It’s a very interesting company,” Merrithew told CTP. “First and foremost, H.I.S. Co. was founded as sort of a small, private travel agency in Japan, much the same way that we were. The founder started the business in late 1980 as a small travel agency. He was a Japanese entrepreneur and has built H.I.S. Co. into an US$8 billion a year diversified travel conglomerate, which is now publicly traded, and in which the principal, the owner, the founder still owns about a 25% interest. And he works at the business today like he did 35 years ago. While it’s publicly traded, it’s very entrepreneurial.”
As a business, H.I.S. focuses on the long term, which is an approach that it has always taken and, Merrithew pointed out, both companies “have very shared values,” like integrity, honesty and a commitment to professionalism.
Yet, the most interesting thing, as Merrithew sees it, is that H.I.S. – a US$8-billion business with 200 locations in 65 countries with 16,000 employees, virtually all Japanese – has a stated goal of growing to US$20 billion by 2020.
“In the first stage of that growth objective,” Merrithew said, “they have earmarked over US$1 billion for acquisitions. We’re the first transaction that they’ve done in the non-Japanese space which gives us a huge opportunity and a huge responsibility.”
He explained further that “most of their current business, certainly in North America, and it is fairly consistent everywhere else in the world, is about 50% is inbound, and 50% is outbound – all Japanese. So, what they want to do with us and through us and together with them is to grow their non-Japanese business.”
Merrithew continues: “They haven’t sent anybody here from Japan to run our business. The Merrithew family is still very much involved in running this business; with a mandate to grow this business. We’re not here for a transition period. We’re not here for three years. We’re not here for five years. There is no timetable. We can retain this equity stake indefinitely.”
As for the bottom line, Merrithew told CTP: “Our commitment to that NewCo is the Merit Travel business. Their commitment to that NewCo is the funding to grow that business to $1 billion in North America over the next three years – like how much fun is that.”