Comment: What now for Thomas Cook?

| July 05, 2019, 15:32

Fosun remains most likely ‘saviour’, says Travel Weekly’s Ian Taylor

The form in which Thomas Cook could emerge from its latest crisis appeared to be taking shape last month, until Lufthansa threw a spanner in the works.

Thomas Cook’s confirmation in early June that it was in talks on a takeover with Chinese corporation Fosun was not unexpected. Fosun already owns 18% of the group.

But aligned with Thomas Cook’s announcement in mid-May that it had received “multiple bids” for its airlines, it appeared to put the endgame in sight.

Podcast: What next for Thomas Cook?

The group would be split – its airlines sold off and Fosun acquire the remaining business.

Lufthansa was the front-runner to acquire Thomas Cook’s German carrier Condor partly because it part-owned it previously and because it had so confidently affirmed its interest.

Carsten Spohr, Lufthansa chief executive, told shareholders in May: “We can offer Condor good prospects and maintain the business as a whole, long and short-haul operations.”

Lufthansa even suggested it could revise its offer to include Thomas Cook’s UK and Scandinavian airlines.

Selling the airline is key to a deal with Fosun as EU rules prevent the Chinese group, or any non-EU investor, owning a controlling stake in a European carrier.

If the airline is sold, the way is clear for Fosun to acquire 51% or more of Thomas Cook’s remaining business.

Fosun could chose to keep a minority of Thomas Cook’s shares listed but would be more likely to take the group private, removing it from the quarterly financial scrutiny a public company attracts and which has caused it so much difficulty.

However, the sale of the airline is not just key to a Fosun takeover, it is crucial to Thomas Cook’s continued operation.

The £300-million line of additional credit Thomas Cook has secured to carry it through the winter is conditional on the carrier’s sale being underway by the end of the current financial year.

If the sale of the airline, or 51% of it, to an EU investor is not underway soon, Thomas Cook and Fosun have only until the end of September to make alternative arrangements. Thomas Cook needs that £300 million from October.

‘Unlikely we’ll get the deal’

The spanner, when thrown, was a large one. Lufthansa had almost certainly planned to merge Condor – which operates short and long-haul leisure routes – with German low cost subsidiary Eurowings.

But Lufthansa issued a second profit warning in two months in June, blaming “market-wide overcapacities”, and put Eurowings into reverse thrust – shutting down its expansion and ditching its long-haul flying.

Almost immediately, it confirmed it is no longer interested in Condor. Lufthansa chief financial officer Ulrik Svensson noted Condor needs “high investment” last week and said: “It’s unlikely we will get the deal.”

Lufthansa was not the only party interested in Thomas Cook’s airlines, of course. Virgin Atlantic was widely reported to have made an offer for the UK airline, although neither company confirmed this.

The Virgin airline – 49% owned by Delta Air Lines and with a further 31% stake about to be taken by Air France-KLM – is no doubt interested in Thomas Cook Airlines’ slots at Manchester and Gatwick and in the long-haul leisure passengers guaranteed by Thomas Cook’s tour operator businesses.

Private equity firm Indigo, which has multiple airline investments including in Wizz Air, is also reported to have bid, as has Lisbon-based charter carrier Hi Fly.

It was Indigo which initially stepped in to save Icelandic low-cost carrier Wow Air at the end of last year only to step back after looking at the business, whereupon Wow folded.

Thomas Cook has also confirmed an offer from private equity firm Triton Partners for its airline and tour operator businesses in Norway, Sweden, Finland and Denmark.

Triton is something of an unknown quantity having only entered the travel sector in February when it acquired Netherlands-based online travel group Sunweb.

The firm added Netherlands and Belgian tour operator Corenden Holiday Group last month, giving it a combined travel business with a turnover of €1.15 billion and 1.75 million customers. Thomas Cook’s Scandinavian operations would make it a serious, second-tier player in Europe.

Triton’s bid was “unsolicited” and may muddy the waters if there is no other bid for Thomas Cook’s Scandinavian airline, since Cook was no doubt intending to sell its operations across Germany, the UK and Scandinavia to Fosun.

But the Triton bid will not have been unwelcome. It gives Thomas Cook an alternative option and some leverage it might otherwise lack – and the group badly needs both.

‘Unwise to rely in the sale’

Without a deal for Condor, or if the airlines fail to achieve a high enough price, Thomas Cook will need a plan B.

Investment analyst Berenberg outlined what this might involve at the end of May.

Noting Thomas Cook’s position remains “precarious”, it suggested the airlines might realise £600 million and argued: “Management would be unwise to rely on the sale to dig it out of trouble.”

Berenberg added: “The chances of undertaking a rescue rights issue even in combination with an airline sale may also not be sufficient to steady the ship.”

In the circumstances, it argued: “The likelihood the company will need to undertake some form of debt for equity swap will increase . . . with or without the airline sale.”

That would mean Thomas Cook’s banks acquiring a large, potentially controlling stake in the group in return for what they are owed.

None of this need mean the end of the company. Thomas Cook has had numerous owners – and undergone numerous forms of ownership – in the past.

It has been privately owned, jointly owned, state owned and publicly listed, been owned by banks (UK and German) and by travel and non-travel businesses.

A more important question is what form a reduced Thomas Cook will take. Berenberg questioned “whether the company would be in significantly better shape absent the contribution of the airline”.

An update on the airline sale had been expected by now. The delay may be telling.

Fosun remains the best bet and most-likely route to salvation, but only with a resolution of the airline issue.

It is worth noting Fosun would be in line for a bargain compared with the deal it might have done four years ago when it first took a 5% stake in Thomas Cook with the latter’s shares priced at 145 pence.

Thomas Cook’s shares were trading at 13 pence on Friday July 5, having fallen back since Lufthansa’s announcement.

Why wouldn’t Fosun want perhaps the world’s best-known name in travel to sell into its home market, China?