Group’s sale of airline now crucial, says Ian Taylor
Thomas Cook’s disastrous half-year results last week have put the group’s continued trading in jeopardy.
That is not my judgment, it’s the view of the Financial Times business newspaper, the front page of which on Saturday proclaimed: “Thomas Cook risks collapse as stock dives”.
The group’s share price fell to 11.8p on Friday, mirroring where it was at the worst moments of Thomas Cook’s last existential crisis in 2011-12.
The earlier meltdown was triggered by three profit warnings in 12 months, not dissimilar to now, and the profiles of the two declines in share value look horribly similar.
Last time, Thomas Cook came back from the brink through a combination of restructuring, securing expensive credit facilities and avoiding further surprising investors and analysts.
All the hard work on that recovery appears now to have been for nought.
Can the group survive this time? Yes, but not in its current form.
Can customers be confident of booking and taking their holidays? Yes, because the holidays are Atol-protected.
Can the CAA, which oversees the Atol scheme, be confident of Cook trading through to the autumn? I would say so, since the group’s creditors would be crazy to bring down the company before most summer revenue has come in.
The headlines from Cook’s half-year results statement gave little clue to the underlying crisis, referring to “performance against a strong prior year . . . Good progress on executing strategy of differentiation . . . Strategic review of airline progressing . . . Challenging trading for summer 2019.”
Chief executive Peter Fankhauser spoke of “an uncertain consumer environment”, a “decision to reduce capacity”, “a keen focus on cash and cost discipline” and an “accelerated transformation of our UK business”.
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He concluded: “The continued competitive pressure resulting from consumer uncertainty is putting further pressure on margins.”
Some of this could have come from the Tui half-year results presentation the day before.
The difference was that Thomas Cook’s headline losses for the winter were shocking, never mind “uncertainty”. The group reported half-year losses of £1.45 billion to the end of March.
The trading figures were not great – a £68 million increase in operating losses for the six months to £282 million – but not that poor.
Tui reported a €301 million loss for the same period, €131 million up on the previous year.
Part of the explanation is banal. Easter fell in the first half of last year and the second half of this so, of course, revenue was down and losses up.
The market is also clearly difficult. UK summer bookings in January-March last year were particularly strong. This year, they have stuttered and stalled since the turn of the year.
But these factors are not calamitous and Thomas Cook’s results were a calamity.
Impairment of goodwill
The group’s operating loss was almost £1.4 billion because of a £1.1 billion write-down or “impairment” of goodwill in the UK business “relating to the 2007 merger with MyTravel”.
Thomas Cook said the deal had to be revalued “in light of the weak trading environment”. Maybe, but clearly the deal was grossly overvalued 12 years on from its completion.
This ‘goodwill’ has comprised a significant part of the group’s value since the merger with MyTravel in 2007.
Why the impairment now? It can only be that chief financial officer Sten Dausgaard, who took over on December 1, insisted on it.
MyTravel was judged to be worth £1.038 billion in the group’s accounts at the end of the last financial year, along with an additional £67 million of goodwill tied to the former group’s ‘brand’.
Clearly, Dausgaard decided it could not be carried any longer. Indeed, a Thomas Cook source conceded: “It could have been done five years ago.”
It was a brave decision, but may prove costly – particularly as a similar thing happened six months ago at Thomas Cook’s full-year results, which were prefaced by a write down in operating profit as a result of the year-end auditing.
Consistent surprises like this destroy confidence and undermine whatever narrative a company has spun, and that is what has happened
Path to survival
The £1.1 billion write-down was bad enough. Financial journalists also drew attention to the group’s auditor raising doubts about the company’s ability to continue trading.
This was a statement of fact that echoed the group’s own assessment of its position and the “material uncertainty” attached to the timing and terms of a £300-million credit facility secured to help Thomas Cook through this next winter.
But repeated in every update on Thomas Cook’s finances it gives an impression that the auditors have cast doubt on the group’s survival chances.
To make matters worse, on Friday investment bank Citigroup weighed in declaring Thomas Cook’s shares to be worthless.
“We fear,” warned a Citigroup analyst, “that news of the £1 billion write-down and the material uncertainties comment from the auditors will unsettle consumers and drive further weakness in bookings.”
This is entirely possible. It could also prove self-fulfilling.
At least the group has identified a path to survival – the sale of its airline. The funds from a sale would clear a substantial part of Thomas Cook’s debt.
The new £300-million credit facility would be available from October to cushion the group through the process, assuming a sale completion would require regulatory clearance and so on.
The catch is that it appears conditional on the airline sale, with the arrangement “principally dependent on progress in executing the strategic review of the group airline”.
So Thomas Cook has until the end of September to get its ducks in a row.
I assume the group has the confidence of its banks. Fankhauser said as much on Thursday, insisting: “Book with confidence because we have a plan and we have the support of the banks.”
The problem now is that Thomas Cook’s woes can take on a life of their own. On Saturday, the Financial Times reported US hedge funds “positioning themselves for a possible restructuring of the company’s debt that would wipe out shareholders”.
Sky News reported payment processors “retaining millions” in customers’ payments, adding to the financial pressure.
Thomas Cook needs to sell its airline. The trouble with that is everyone now knows it is a distressed sale.
It is difficult to see the airline attracting the kind of acquisition price Thomas Cook needs – ideally about £850 million – whether it is sold as one or is broken up.
Why would a prospective buyer even rush to close a deal when delay could drive down the price?
And where will the loss of the airline leave the group without its passengers, its revenue and its profits?
It can only be a much-reduced Thomas Cook that emerges from this process.
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