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 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