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FEATURE: Can Thomas Cook survive its refinancing? 23 April 2013

With turnaround practitioners at odds over the future of the 171 year old travel firm, Joe McGrath investigates whether Thomas Cook can still make it.

At a time when banks are facing huge criticism for allowing failing businesses to struggle on, Thomas Cook provides a fascinating case study. On the one hand it declared a £127.9 million loss in the last three months of December with a reduction in gross profitability compared to the previous year.

On the other, its cost-cutting strategy from recently installed chief executive Harriet Green is starting to bear fruit. The aforementioned loss was down from £151.7 million during the same period in 2011 and further cuts since these results look set to improve operational efficiency still further in 2013.

In fact, the recent fanfare of achievements from the charismatic Green left many with only a vague recollection of the difficulties that Thomas Cook was in when she took over the reins. But it is quite a catalogue of failures to erase from memory completely.

Back in November 2011, Royal Bank of Scotland’s Global Restructuring Group, supported three other lenders in providing an additional £100 million of debt to fund the turnaround of the business. This followed a similar £100 million loan in October, in which RBS did not participate. It was reported at the time that the business was so close to collapse that these two loans were the difference between its survival or not.

Roughly three weeks on and the company confirmed it was closing 200 stores and slashing 1,000 jobs after posting a pre-tax loss of £398 million for the year to 30 September, compared to a profit of £41.7 million a year earlier.
Investors were furious as the share price tanked and a feeding frenzy ensued in the press with business commentators blaming former chief executive Manny Fontenla-Novoa for a catalogue of errors which had led to a series of writedowns leaving the business vulnerable.

At one point, the business’ market capitalisation stood at just £127 million, with shares trading at 14.5p.
As 2012 dawned, the press headlines kept coming. The now demonised Fontenla-Novoa found he was to have his severance payment of £850,000 deferred after the business was told to relinquish a 4.9% equity stake in the business to its lenders.

The drama continued into February when arch rival TUI Travel started an advertising campaign trumpeting its financial strength, reminding customers of the benefits of booking with a brand they can trust.

By the time first quarter results came around, three-month losses had mounted to £91 million which the new interim chief executive Sam Weihagen attributed to the eurozone troubles and conflicts in the Middle East. Shareholders raised eyebrows and demanded more.
As the company stumbled into March, it confirmed that its 16,000 staff would no longer receive significant discounts on holidays which the business said would save it a further £35 million a year.

So far, so good. However the spectre of a lack of financing remained on the horizon and the reappearance of the begging bowl was almost inevitable going into April.

With the days getting longer, the tour operator turned its attention to the upcoming repayment deadline for a multi-million pound loan. Eventually, the banks agreed a £1.4 billion deal ensuring that 5% of shares would be awarded to the group’s lenders for a two year extension of its finance facilities until 2015 on payment of a one-off fee.

At this point, the group also put the ‘for sale’ sign outside its offices in India and it sought to offload its stake in air traffic control business NATS.

Credit where it’s due
24 hours after news of the refinancing had surfaced and attention turned to the longer term commitment from credit insurers. By 11 April 2012, media reports were emerging that bosses at insurance firm Euler Hermes were planning to remove credit insurance cover for companies dealing with the tour operator. Thomas Cook’s shares plummeted once more.

Euler Hermes initially denied the reports to journalists at the Daily Telegraph before eventually clarifying that it would only continue with bonding cover from now on. Effectively, it was only willing to cover fraud or a lack of competence.

In May, the £1.4 billion finance deal which had been negotiated with no less than 17 lenders was approved by shareholders. Barclays and RBS led the consortium. The banks were much tougher than had been anticipated, however and asked for a £14 million fee along with the option to buy up to 10% of the group before May 2015.

Shortly after the deal was announced, the blood that shareholders had been calling for was finally spilt, with the departure of Paul Hollingworth who had been the finance director with the firm since early 2010. A replacement was not immediately announced.

After two months of a relative breather in the press, the media turned up the heat once more in July after Standard & Poor’s slashed the group’s credit rating and warned that the company’s capital position was simply ‘unsustainable’. With its S&P rating now down to B- from B with a negative outlook, further borrowing options looked set to become even more costly.

Around the same time, Keryn ‘Harriet’ Green rolled up her sleeves and marched into the offices of the embattled travel group. Initial reporting of Green’s appointment wasn’t exactly favourable. Until now, her career had been spent outside of the travel industry and she was a world away from the old boys’ network of the City. That said, she had the ears of those who mattered and is notably a member of Prime Minister David Cameron’s business advisory group.

She was born in Cheltenham and raised in rural Gloucestershire, but didn’t really grab the attention of the City until she started turning out stellar results at Premier Farnell plc when she took over as chief executive between 2006 until her move in 2012. Her record at Premier Farnell showed an impressive ability to transform a business harnessing the internet to drive growth while ensuring employees buy in to the changing environment around them.

By the compulsory reporting announcement at the end of September 2012, Green received her first public dose of reality, however. UK bookings had fallen by 1% and sales of the group’s mainstream packages were down 9%. Worse still, the 1% decline in overall bookings didn’t match up well to the performance of rival Tui – the parent company of Thomson. It reported a 5% jump in bookings over the same period.

However, Green stood firm as the inevitable torrent of negativity swept into the company once more, saying that these figures provided nothing new in that there were ‘no new negative surprises’.
Fast forward to February and the group confirmed that Thomas Cook Airlines UK was to merge with its sister airline brands in Germany and Belgium.

Following the merger TCA UK, Condor (Germany) and TCA Belgium became one airline with a board chaired by the group head of travel and the chief executive of Condor.

The airline’s new “group board” included the appointment of Cor Vrieswijk, who joined Thomas Cook as the new chief operating officer of TCA UK from March 1 2013.

His role has been to coordinate and oversee all operational activities across Thomas Cook Airlines as part of his wider remit.

Trimming or turnaround?
As March passed, Green’s stony-faced stubbornness appeared to be paying off. Since sweeping into the business she had presided over myriad mergers and the closure of 195 travel agency branches with the axe falling on 2,500 jobs.

By the time she attended her first media conference later that month, she was outlining yet more cost savings on top of the £160 million already announced. Another £50 million in savings was to be found and a new corporate identify programme was to be introduced reducing the group’s operating brands from a whopping 27 to just nine.

Speaking to journalists in a two hour presentation, Green said she had spent her time with the business so far working with market analysts to assess where market growth was likely to come from.

She said: “Our core, sun and beach market is large and still growing – counter to some of the grimmer predictions made in the recent past. Secondly, packages are also growing – particularly in Germany and Sweden. Thirdly, there are a number of other holiday types that are growing – some quite fast, such as City Breaks – but are currently a very small part of our portfolio.”

Having discovered the areas, such as City Breaks, where Thomas Cook is not taking full advantage of the growth potential, a change of tack was deemed necessary. Green said the business would now meet customers’ holiday needs “beyond the summer vacation”.

The markets have, so far, responded well to Green’s plans, with the market cap at around £1 billion once more and the share price trading well above the 100p mark at the time of writing. Of course, this could be impacted by any anticipated rights issue.
With the next refinancing deadline fast approaching, the challenge now is whether Green can continue to increase profitability whilst simultaneously trimming the costs.

Graeme Smith, advisory partner at Zolfo Cooper, says it will all depend on the progress of the company against its plan.
He explains: “Where the company is probably looking to get to is so they can grow their profits to the extent that it just becomes a normal market refinancing. With the steps that are being taken in terms of the cost savings and the non-core disposals, you need to look at it in terms of relatively short-term actions.

“In terms of the longer-term growth play, they need to be on a trajectory of demonstrating they are working. Interestingly, the things they are talking about with cost-savings and online growth are not things which are just dependent on the overall market improving, it is doing very specific things to take better advantage of things already in the market. There have been rumours of a potential equity-raising in some point in the future.”

Property concerns
The company has also still to battle with the incredibly obese property portfolio what has come about from the many mergers of the past. With so many retailers falling by the wayside for exactly this reason, shareholders are rightly concerned about the pressure this is still placing on the business.

Nick Hood, head of external affairs at corporate analysis group Company Watch says the accidental growth of this property portfolio has been one of the most devastating costs for the business in recent years.
He says: “Among many poor decisions taken by past Thomas Cook management, one of the very worst was playing double or quits with its retail estate by acquiring the Co-Operative Travel business in 2010.

“Its high street profile was already bloated with duplications from the My Travel merger in 2007. The result was a bricks and mortar profile completely out of kilter with a market already moving inexorably to online booking and now into multi-channel with mobile apps.”

With numerous branches already closed by Green questions have been raised about just how many more closures are possible for the company. However, Hood believes that the new management team can go a lot further.

He says: “The latest round of another 195 closures announced last month still leaves Thomas Cook with 874 retail outlets, significantly more than its arch rival Thomson and well in excess of what most travel industry pundits think is the appropriate level.

“Among many other commercial puzzles still to be resolved, this is a significant ongoing challenge. It’s fortunate that the group was able to refinance its £1.4bn debt mountain last year, so that it has the cash, the time and for now at least, the confidence of its backers to continue with the much-needed programme of asset disposal and with the inevitable further reductions to the store portfolio. Closing shops is an expensive game”

  • This feature is taken from the April edition of Insolvency Today magazine. You can read the full story by subscribing here:



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