Christopher Jones is a managing director at international investment bank Altium Capital and leads the firm’s focus on the travel sector
The recent twin announcements of the sales of Gold Medal and Elegant Resorts is thought to mark the end of Thomas Cook’s heavily publicised disposal programme.
While both deals required Cook to book a loss on disposal (Gold Medal was sold for £45 million, little more than half the £87 million it paid in 2009 and Elegant Resorts traded for £14 million, £2 million below book value), they also enable Harriet Green and her team to move on and concentrate on the day job.
The divestiture programme (which also included the earlier sales of Essential Travel, Neilson and Cook’s stake in Nats) generated total proceeds of £125 million, broadly in line with Cook’s guidance at the outset of the programme, and some way ahead of time.
What is less clear is the degree to which the balance sheets of the regulated entities (Gold Medal, Elegant and Neilson) had to be repaired (via the injection of cash or assets) prior to sale to obtain clearance from the CAA.
The disposals have been greeted positively by City analysts who have been keen to see Thomas Cook emerge from the mire of 2011 as a leaner, more focused business.
In that sense, it is very much a case of mission accomplished for Thomas Cook, with the sales freeing up financial and management resources to focus on the core mainstream and differentiated product, following in the footsteps of undisputed market leader Tui.
The market has also roared with approval, with Cook’s share price, in spite of recent softness across equity markets, hovering at a two-year high and up a staggering 1,200% since the nadir two years ago (what a wonderful thing hindsight is).
The disposals, although all different, represent exciting opportunities for the new owners.
The acquisition of activity holiday company Neilson by Risk Capital, the private equity investor chaired by Luke Johnson, is arguably the most interesting of the Thomas Cook disposals.
Neilson has been losing money for years as part of Thomas Cook and the losses were enough to scare-off all but the bravest of acquirers and investors, but Risk Capital could have bought itself a diamond in the rough.
Neilson is a tour operator with fantastic product (award-winning ski, beach and sailing holidays that are well regarded across the industry), however Cook never managed to make the numbers work, with the business losing over £10 million in its most recent accounts – not helped by the group reportedly using it as a “dumping ground” for internal flight capacity through the winter.
The management team, led by new chairman Richard Bowden-Doyle, will soon be free of those shackles.
With the ability to buy flights on the open market to match demand, and the introduction of more sophisticated yield management and product distribution, allied to improving fundamentals (strengthening of sterling/improving consumer confidence), we would not be remotely surprised to see Neilson enjoy a dramatic turnaround under its new ownership.
Middle East-based Dnata was the logical buyer for Gold Medal given both the large volumes the operator sends to the region and also the opportunities for (Dnata owned) Travel Republic to partner more closely with Gold Medal on long-haul product.
Dnata’s investment in the tour operator has also been very well received by independent agents, who see it as a vote of confidence in the UK travel trade.
The acquisition of long-haul luxury tour operator Elegant Resorts, by another (lesser known) Middle Eastern travel group, Al Tayyar, was greeted with surprise by some in the City.
UK trade buyers and PE investors were not tempted by Elegant; however, it still enjoys a strong brand and an enviable customer database which will have strongly resonated with the well-funded purchaser.
From Altium’s perspective it is certainly encouraging to see increasing levels of activity from trade buyers in UK travel sector M&A, even if UK and European trade buyers continue to be conspicuous by their absence.
Just as Tui practically had everything its own way in the early to mid 2000s as it made a raft of acquisitions in its specialist and activity division, since 2009 M&A activity has been heavily skewed towards financial investors (private equity).
While this is a healthy vote of confidence for the sector (PE activity has been far more muted across the wider leisure and retail sectors), it is not a sustainable state of affairs in the longer term.
Private equity investors tend to have 5-7 year time horizons, and while we continue to witness PE assets being ‘passed up the food chain’ in secondary and tertiary buy outs, at some point the game of pass-the-parcel must come to an end, either via IPOs or the return of corporate acquirers.