No doubt­ing Thomas

Thomas Cook is flirt­ing with dan­ger again af­ter com­ing close to col­lapse in 2011. Oliver Gill ex­am­ines how much tur­bu­lence it can take

The Sunday Telegraph - Money & Business - - Front page -

The boss of Thomas Cook has hit back at spec­u­la­tion about the com­pany’s long-term fu­ture, promis­ing that it is “here to stay”. De­spite the re­cent rout in the trou­bled tour op­er­a­tor’s shares, it has the sup­port of lenders and ma­jor share­hold­ers, ac­cord­ing to CEO Peter Fankhauser. Founded in 1841 with a one-day rail ex­cur­sion at a shilling a head from Le­ices­ter to Lough­bor­ough, Thomas Cook is one of the old­est names in the world travel busi­ness.

An alarm­ing sense of déjà vu de­scended over a se­lect group of travel an­a­lysts who con­gre­gated in Paris one morn­ing last month. Seated at the head of­fice of Ac­cor Ho­tels on Rue Henri Far­man, a stone’s throw from the River Seine, chair­man Sébastien Bazin kicked off the French ho­tel gi­ant’s cap­i­tal mar­kets day with a slide en­ti­tled “Travel & Tourism: A Blessed In­dus­try”.

The au­di­ence, how­ever, was dis­tracted by events back in the UK. Thomas Cook, one of the world’s old­est travel agents, had shocked the City with its sec­ond profit warn­ing in as many months. The com­pany’s board had con­vened the evening be­fore to re­view the full-year re­sults be­fore pub­li­ca­tion. Armed with bad news, ex­ec­u­tives had no choice but to up­date the stock mar­ket two days early.

As an­a­lysts pored over the com­pany’s state­ment, they be­gan check­ing off a string of prob­lems that looked wor­ry­ingly sim­i­lar to when it had been taken to the brink seven years ear­lier. Net debt worse than ex­pected? Tick. Test­ing con­ver­sa­tions with banks? Tick. Prof­its hit by prob­lems out­side of man­age­ment’s con­trol? Tick. Chunky ex­cep­tion­als, plung­ing share price, div­i­dend sus­pended? Tick, tick, tick.

What fol­lowed was a stock mar­ket rout of epic pro­por­tions. De­spite protests to the con­trary, fears were raised that Thomas Cook may not even see Christ­mas. It took eight days for the sell-off to be ar­rested. A com­pany that had been worth £2.2bn in mid-may fell to lit­tle more than £300m.

On the ad­vice of its bro­kers, the com­pany had ex­plained that it was com­pli­ant with its bank­ing covenants. CEO Peter Fankhauser ex­plained it had re­set the terms of its bor­row­ings and had suf­fi­cient cash on its bal­ance sheet. “How much?” an­a­lysts clam­oured. “Enough,” was all he would say.

On Thurs­day Nov 29 the an­nual re­sults were con­firmed. Half-year pre-tax losses were £53m on rev­enue of £9.6bn; last year it had posted £43m of profit. Net debt had bal­looned to £389m – much more than the City had pen­cilled in. A round-ta­ble al­lowed an­a­lysts the first op­por­tu­nity to eye­ball Fankhauser since Tues­day’s un­wanted sur­prise. He was in for a tough ride. “The an­a­lyst com­mu­nity was narked off be­cause they were caught un­aware,” said an in­sider. Mar­gins had been oblit­er­ated by the sum­mer’s record tem­per­a­tures, Thomas Cook’s boss ex­plained. Hol­i­day­mak­ers had re­frained from book­ing in the “lates” mar­ket, pre­fer­ring to stay at home and bask in the heat­wave. In ad­di­tion, he said that a se­ries of “sep­a­rately dis­closed items” would now be ap­plied to un­der­ly­ing prof­its. It was an ac­count­ing change that took things from bad to worse.

As shares trun­dled south­wards, some an­a­lysts were ten­ta­tively con­vinced. One, in par­tic­u­lar, was not and landed Thomas Cook a ham­mer blow just as Fankhauser and in­terim fi­nance chief Sten Dau­gaard em­barked on a se­ries of frosty in­vestor meetings. In a with­er­ing sell note, Beren­berg’s Stu­art Gor­don tore into the com­pany, sign­post­ing a £400m rights is­sue and re­duc­ing his tar­get price from 65p to just 12p – at that point a third of its al­ready rapidly di­min­ish­ing value. “Cap­i­tal struc­ture may be un­sus­tain­able,” read a par­tic­u­larly pun­ish­ing ti­tle.

It was against this back­drop that an eq­uity prob­lem then bled into the debt mar­kets. Cor­po­rate bond yields started to spi­ral. The cost of in­sur­ing against Thomas Cook de­fault­ing on its debt leapt to all-time highs. F ankhauser be­lieves share­hold­ers re­main on their side. “I have the feel­ing that they are sup­port­ive. It is a re­la­tion­ship that I took care of from the very be­gin­ning,” he said last week, fol­low­ing a round of ur­gent in­vestor meetings.

“I agree that they re­alise that there was a step back; that there was not a good fi­nan­cial per­for­mance in 2018.

“But they un­der­stand that the fun­da­men­tals – what we have worked on in the last three years – are in­tact.”

In­deed, he had good rea­son to hope the worst was be­hind him. A run on the com­pany’s stock had been snapped some rare good news.

First, Jef­feries an­a­lyst Re­becca Lane pub­lished an ex­ten­sive note that in other cir­cum­stances would not have been well re­ceived by the com­pany. Slash­ing her tar­get price from 110p to 43p she wrote: “Al­though we ac­knowl­edge the risk, our cen­tral the­sis is that Thomas Cook can avoid a cap­i­tal raise.”

Next, In­vesco, a 14pc share­holder and Thomas Cook’s big­gest backer by some mar­gin, is­sued a state­ment of sup­port. The com­pany’s “fun­da­men­tals re­main ro­bust”, said fund man­ager Stephen An­ness. The mar­ket sen­ti­ment was an “over­re­ac­tion”, he added. The shares ended Wed­nes­day more than 50pc higher.

Still, the par­al­lels with 2011, when Thomas Cook was on the verge of col­lapse, are star­tling. The com­pany had just cel­e­brated its 170th birth­day when panic set in. The Arab Spring meant de­mand to Thomas Cook’s hol­i­day strongholds – Egypt, Tu­nisia and Tur­key – had evap­o­rated. UK con­sumers were be­ing squeezed. The com­pany an­nounced it would need to “re­visit” its busi­ness model. It would be al­most a year be­fore Thomas Cook’s fi­nan­cial foun­da­tions were re­stored.

Are such com­par­isons jus­ti­fied? “[Thomas Cook] would ar­gue not. I am not sure I agree with them,” Beren­berg’s Gor­don said.

“Their brand got trashed [in 2011]. Peo­ple didn’t book with them. Their book­ings stayed very soft and that’s why they came back to the mar­ket [to com­plete a £425m rights is­sue].”

Man­age­ment should re­frain from fire­fight­ing and com­plain­ing about what an­a­lysts think, says Gor­don.

“What they should be do­ing is go­ing out of their way to re­as­sure the con­sumer to book a hol­i­day. Not re­as­sur­ing share­hold­ers they are not mak­ing a rights is­sue.”

Fankhauser, who has been with the firm for 13 years, dis­agrees: “In

‘What wor­ries me about the Thomas Cook story is that they sim­ply do not seem to be giv­ing any thought to how to rem­edy this. They just don’t think there is a prob­lem’

2011 we didn’t have such a con­clu­sive strat­egy. We didn’t have a real way for­ward. We didn’t have the sup­port of the banks. So it is ma­te­ri­ally dif­fer­ent.”

“The per­for­mance was not good [in 2018]. My task is to give the con­fi­dence back af­ter two profit warn­ings.”

Gor­don is par­tic­u­larly con­cerned by nearly €1.2bn (£1bn) of bonds Thomas Cook has to re­pay over 2022 and 2023. The yield on these will make them im­pos­si­ble to re­fi­nance in listed debt mar­kets, he ven­tures. Un­less the busi­ness can be turned around “in­cred­i­bly quickly”, he says, dis­cus­sions with lenders must start in 2020. But by then Thomas Cook will need to have turned around its per­for­mance to con­vince lenders to ex­tend bor­row­ing fa­cil­i­ties.

“What wor­ries me about the whole Thomas Cook story is that they sim­ply do not seem to be giv­ing any con­sid­er­a­tion how to rem­edy this. They just don’t think there is a prob­lem. I would ar­gue that as we go through 2019, un­less there is a sig­nif­i­cant turn­around, this prob­lem will de­te­ri­o­rate fur­ther.

“At some point there will be a con­ver­gence of weak op­er­at­ing mo­men­tum and a need to re­fi­nance debt. Un­less they had ad­dressed their eq­uity base by then, they are putting their whole fu­ture in jeop­ardy,” he adds.

Of course, this de­bate as­sumes that Thomas Cook re­mains in one piece.

Spec­u­la­tion has per­sisted through­out the sec­ond half of 2018 that the com­pany’s air­line – which was the one shin­ing light in its an­nual re­sults – could be spun off.

Fankhauser has brushed aside such sug­ges­tions, but Bar­clays an­a­lysts sug­gested a sale of the air­line could help re­duce its debt pile. Jef­feries an­a­lyst Lane, mean­while, said its air­line “has trans­formed from a sideshow, into an im­pres­sive air­line in its own right” es­ti­mated it to be worth £1.1bn.

Some sug­gest it was a mis­take to high­light dis­cus­sions with its lenders. “You’re damned if you do and damned if you don’t,” quipped one in­sider.

Ei­ther way, the news has pro­vided fer­tile ground to the bears such as Gor­don that claim Thomas Cook’s prob­lems are un­sus­tain­able.

Oth­ers say that the com­pany now of­fers an “op­por­tu­nity” for in­vestors given the col­lapse in its shares.

Fankhauser is “dis­ap­pointed” af­ter “so much hard work,” he said.

And he has one message for the doubters: “Thomas Cook is a great com­pany and a great brand. And it is here to stay.”

Fun in the sun: women en­joy­ing ice creams in Heb­den Bridge, West York­shire in July. Chief ex­ec­u­tive Peter Fankhauser blamed his com­pany’s trou­bles on the un­usu­ally hot weather this past sum­mer

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