Analysis: Thomas Cook – only one way out?

Company in crisis following last week’s shock results. Ian Taylor reports

Thomas Cook is fighting for survival after a disastrous last week when it announced a £1.4-billion winter loss and a rise in group debt to £1.2 billion.

The group’s share price plunged, investment bank Citigroup declared the shares “worthless” and analysts drew attention to a note by Thomas Cook’s auditor raising doubt about the company’s ability to continue trading.

The share price fell to a new low this week just above 10p after a weekend report in the business newspaper the Financial Times that US hedge funds were buying up Cook shares “for a possible restructuring of the company’s debt that would wipe out shareholders”.

Podcast: What next for Thomas Cook?

A separate report suggested card payment processors were “retaining millions” in customer payments.

Thomas Cook confirmed on Monday that it is in talks with an unnamed card supplier, insisting it is confident of reaching “an acceptable solution”.

Cook’s problems have been deepening for months with its share price dropping throughout last year.

The group issued profit warnings last September and November without appearing to spook consumers.

That changed on Thursday of last week with media reports questioning Cook’s ability to survive and some customers querying the wisdom of booking with the company.

The meltdown was triggered by Thomas Cook’s inclusion in its results for the six months to March of a £1.1-billion write-down or ‘impairment of goodwill’ in its UK business “relating to the 2007 merger with MyTravel”.

Thomas Cook’s survival now depends on selling its airline to reduce its debt, following a review announced in February.

Chief executive Peter Fankhauser reported: “We have received multiple bids for the whole or parts of the airline business.”

Lufthansa has confirmed it has made an offer for German carrier Condor with an option to acquire the airlines in the UK and Nordics. No other bidders have been confirmed, although Virgin Atlantic is reportedly interested in the UK airline.

Fankhauser also confirmed Cook has been granted a new £300-million financing facility by “our leading banks” to provide “bridging finance” through next winter.

This will be available from October 1, but its availability “is dependent on progress” in selling the airline.

The downgrade of Thomas Cook’s credit rating on Thursday of this week heightened the sense of crisis although it merely recognised the group’s need to sell its carrier.

A Thomas Cook spokesman confirmed: “The airline review is the key focus for the business.”

The carrier needs to sell at a high-enough price to restore Cook’s finances. Analysts suggest bids could range from £650 million to above £1 billion, but a high price seems unlikely in Cook’s difficult circumstances.

An industry source also noted: “The complicated part of the sale is that the airline has a close relationship with the tour operator.”

The airline, which is profitable, accounted for 40% of group revenue in the six months to March. Its loss will leave a much-reduced group.

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