Shares in travel operator Thomas Cook (TCG) are flying high, marked up 18% to 29p on Tuesday after a Sky News report over the weekend that bidders are circling.

According to the report, which hasn’t been confirmed by the company, Thomas Cook has been holding talks with several parties about a possible takeover or break-up of the group.

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The firm's announcement back in February that it was launching a strategic review of its airline business looks as though it may have flushed out potential bidders.

Investment banks Bank of America Merrill Lynch, Credit Suisse and Morgan Stanley have been advising on the airline review.

Fosun Group, with which Thomas Cook operates a joint venture in China, is the leading shareholder in the company having recently taken its holding over 17%, although EU rules on ownership would prevent it from operating the airline in Europe.

Instead, the Sky News report suggests that Fosun has lodged an interest in buying the firm’s tour operating business to add to its existing Club Med holiday operations.

US private equity firms are also said to be interested in bidding on the tour operations, while a more likely bidder for the airline – which could be worth up to £3bn according to analysts – would be Germany’s Lufthansa.

It is thought that any deal would have to include a provision for Thomas Cook’s holiday customers to travel on the new owner’s aircraft.

COMPETITIVE PRESSURES

The airline industry has been struggling with price wars, rising fuel costs, industrial action by crews and uncertainty over Brexit which has prompted UK consumers to consider ‘staycationing’ rather than holidaying abroad.

Travel operator TUI (TUI) has issued two profit warnings this year due to specific issues at its Markets & Airlines units.

In February the company blamed over-capacity and weak margins on flights for lowering its full year forecast, and in March it cautioned that the grounding of its Boeing 737 Max fleet could cost between €200m and €300m in increased operating costs.

At the start of this month, rival operator EasyJet (EZJ) warned that it had seen weaker customer demand and ‘increasing softness in ticket yields’ in the UK and across Europe.

However, analysts are turning more positive on the prospects for the sector with Morgan Stanley this week citing a combination of consumer confidence data and Google Trends as suggesting that UK outbound holiday bookings are improving after the weak first quarter.

UNATTRACTIVE FINANCIALS

Before this weekend’s Sky News report, Thomas Cook shares were trading at their lowest level since late 2012 after the company reported a £163m post-tax loss for 2018.

As well as the scale of the losses, investors have become increasingly unhappy with the company’s level of debt. At the end of last week, net debt of £389m exceeded the firm’s market value while total debt is around £1.4bn.

Earlier this month the company revealed that it may have accidentally breached its banking covenants due to a mis-interpretation of its level of borrowings.

These possible breaches could mean that the company would be ‘unable to roll over existing credit facilities for the purpose of day-to-day treasury management’.

According to the Sky report, advisers from AlixPartners are working on improving the group’s balance sheet and cutting costs, leading to the recent announcement that it would close 21 of its 500-plus high street shops.


Issue Date: 23 Apr 2019