Contrary to reports, the group will not be broken up, reports Ian Taylor

There is a degree of nonsense abroad about Thomas Cook and it’s prospective takeover by Chinese Group Fosun.

This line from a recent Sunday Telegraph article is not untypical:

“One of the industry’s best-known brands will almost certainly emerge from this latest shake-up as a shadow of its former self, dramatically paired back as some sort of pseudo online aggregator of holidays.”

This does not follow at all from what we know of the proposed deal, although what exactly is wrong with an online aggregator – Expedia, anyone? Booking? – I’m not sure.

Podcast: Thomas Cook – future secured?

Thomas Cook confirmed on July 12 that it is in talks on a takeover by Chinese group Fosun and its creditor banks, with a deal due by September.

The Telegraph noted: “The restructuring will save one of the travel industry’s most illustrious and oldest names from the scrap heap.” That is correct – Thomas Cook looked set to fold without a deal.

The newspaper suggested “the best [Thomas Cook chief executive Peter Fankhauser] could muster” to describe the deal was as “a pragmatic solution that secures the business”.

That is exactly what it is. The alternative was clear. In the circumstances, a pragmatic solution was – er, pragmatic.

What is the Telegraph’s problem – that Fosun is Chinese? Skyscanner is owned by Chinese online travel giant Ctrip. This does not appear to have done it any harm.

Marketing campaign a mark of confidence

Thomas Cook launched a multimillion-pound marketing campaign this week. It seemed a pretty obvious declaration of new-found confidence. The group reined in its marketing early in the year, remember.

But the discussion on social media was of Thomas Cook’s “desperation” to sell “distressed stock”.

I would say not. Thomas Cook has been in dire straits, yes. It was poised to go out of business in October without a substantial injection of cash.

The group’s £1.1 billion write-down in May was hugely damaging. But with hindsight it now makes sense.

The gross over-estimation of the historic ‘goodwill’ towards the MyTravel business absorbed by Thomas Cook in 2007 should never have remained so long on the balance sheet.

But it was there, presumably, to shore up Thomas Cook’s collateral for loans, and if Cook was to have a new owner, the books needed cleaning up.

Fankhauser did not accumulate the group’s current debt. It’s a hangover from Thomas Cook’s previous near-death episode in 2011-12 – which in turn followed a period of crazy expansion by merger and acquisition, including that merger with MyTravel.

A lot of other businesses followed a similar trajectory until the ‘credit crunch’, the financial crash and recession of 2007-09 which was followed by a lengthy period of economic stagnation.

Most business sectors bar tech reined in their empire building for a bit, but Thomas Cook under its then leadership went for scale – accruing debt.

One might consider Thomas Cook’s retail estate a metaphor. Thomas Cook’s tie up with The Cooperative Travel in 2011 gave it about 1,260 shops in the UK – double what anyone believed its sales warranted.

It has now reduced the number to well under half that – around 560. What Fankhauser has not been able to do is reduce the debt.

Worse, because the group had to refinance entirely in order to survive its meltdown in 2011-12 the costs of its debt are way higher than debt piles at some other businesses, when the cost of borrowing generally is at a historic low.

The transformation of the business has not proceeded fast enough or raised Thomas Cook’s margins enough to keep up with, let alone pay down, its debt. Hence where it is now.

Separate but not broken

Thomas Cook’s initial get-out-of-jail plan was to sell its airline to clear some debt. That always looked tricky. Europe’s aviation market is saturated. Who would want its carriers?

Lufthansa looked set to snap up Thomas Cook’s German airline Condor, then thought better of it. But Thomas Cook never appeared likely to make the £750 million or so it needed from the sale.

What is more, disposal of the group airline posed difficulties. It required the disentanglement of mutually dependent businesses and Thomas Cook would need secure flight commitments from the new owner or owners.

The need for advantageous terms on this flying would obviously cut against efforts to obtain a good price.

This way – with the banks and bondholders taking over Thomas Cook plc which will retain the airline, and Fosun acquiring the rest of the group – the airline stays with the tour operator.

They will be separated, of course, but not broken up as would have happened with the sale of the airline.

What about the terms of the takeover?

We don’t yet know the terms of the takeover. These will be under discussion and there are significant issues to address.

How much debt will the banks and bondholders write off? How much of Thomas Cook plc and the Fosun-owned tour operating group will the banks own?

How much capital will Fosun will put in for how much of Thomas Cook? How much if anything will Thomas Cook’s shareholders receive? How many if any of Cook’s shares will remain listed.

My guess is Thomas Cook would prefer to be taken private – removing the group’s results from the pain of public scrutiny.

However, that being the case, Fosun or the group’s creditors will need to pay something to shareholders now or promise a return to them in future.

There must be something in it for the big institutional investors otherwise why would they support the takeover? That something may not have to be much, but it can’t be nothing because shareholders will have to agree formally to the proposals.

As of this week, 43% of Thomas Cook’s shares were held by institutional investors. Agreement with them, allied to Fosun’s 18.6% stake, would set the group well on its way.

But there is a need for urgency. Thomas Cook needs agreement on the recapitalisation and injection of new money by September.

The legal separation of the entities and takeover by Fosun will take longer and probably be completed only by the end of the year.

Thomas Cook will hope to proceed by consensus. Fosun can almost certainly be relied upon to be discreet, as can the banks and bondholders.

Should media reports of antagonism towards the deal emerge in the coming weeks, the source will almost certainly be one or two shareholders. But to any who say ‘no’ to the deal – what is the alternative? There isn’t one.

Fosun won’t change Thomas Cook

Beyond this autumn, then what? The creditor banks and bondholders which take over the airline won’t plan on holding it in perpetuity.

They will plan on selling it as soon as possible. Banks generally make a point of not owning airlines, so they will want to see an exit and there will be renewed speculation down the line.

Thomas Cook/Fosun will hope by then that the capacity pressure in Europe has eased and the group’s prospects appear quite different.

Fosun won’t seek to change Thomas Cook’s European business. Why would it? The Chinese group will seek to grow beyond Europe and look for synergies with resort group Club Med which it acquired in 2015.

One source close to the deal noted: “Thomas Cook has a massive distribution platform and great agency relationships across Europe. It would be a great way to distribute Club Med product.”

In the circumstances, we can take at face value the reassurance Thomas Cook UK retail director Kathryn Darbandi recently offered UK trade partners.

“Thomas Cook is here to stay,” Darbandi wrote in a letter sent after the proposed deal was announced.

“The two businesses will maintain a close and interdependent relationship. It is business as usual for you and your customers.”

I would say that is right – provided the recapitalisation goes through by September.

MoreFosun: What you need to know

Chinese group would retain Thomas Cook name [June 19]

Comment: What now for Thomas Cook? [July 5]

Comment: Can Thomas Cook survive? [May 19]