The Thomas Cook Group Plc met with its unceremonious end on 23 September 2019 when it applied for bankruptcy protection in a United Kingdom High Court after making desperate efforts to survive for a year when it was reeling under a mountain of debt. The company’s largest shareholder, Fosun International Ltd of China, which had come to the rescue of the company on previous occasions, couldn’t muster the courage this time to inject additional funds required by the company, resulting in the British holiday maker’s collapse. The Financial Conduct Authority (FSA) of the United Kingdom suspended the shares of the company from trading on the London Stock Exchange on the same day acting on the recommendation made by the company.
The end of the company came after weeks of hectic negotiations between the company and its strategic investor, Fosun International Ltd, with the management of the company making a last ditch effort on Sunday, 22 September 2019, to persuade Fosun International Ltd to lend it an additional £200 million in excess of the £900 million it had previously agreed to fund. This forced the management to approach the UK Government for the said additional funds to bail out the company from the present crisis which, however, did not materialize. Finally, on 23 September 2019 the management of the company moved an application with The High Court seeking bankruptcy protection thereby putting in motion the compulsory liquidation proceedings of the company and asked the Financial Conduct Authority (FSA) to suspend trading in the shares of the company.
Thomas Cook, the iconic British holiday maker, had previously tendered requests to its bondholders to give it more time to secure the said £1.1 billion rescue deal from Fosun International Ltd of China, the company’s bankers and other investors while facing the prospect of imminent collapse under mounting burden of debt. The deal, had it materialized, could have brought to the company’s coffers some funds to see through its operations during winter of this year, which for the leisure travel industry is essentially a lean season.
The company was seeking the funds ahead of a lean winter season which was further exacerbated by a gloomy business outlook for the industry marred by the ill effects of Brexit.
The tour operator had a net debt of £1.247 billion on its books as of 31 March 2019 with loss from operations of £245 million on sales of £3.019 billion as on that date, as reported for H1 FY19.
The deal which was being dubbed as recapitalization plan by the tour operator would have seen substantial ownership of the company being passed on to Fosun International Ltd. Other than that, the strategic investors would have also got a larger stake in Thomas Cook’s profitable Airline operations. This deal, however, would have left little value for the erstwhile shareholders of Thomas Cook group, as they were already in minority. The stocks of Thomas Cook group have been falling on the London Stock Exchange during the past one year with the stock losing nearly 90 per cent of its value during the period.
The holiday provider was one of United Kingdom’s iconic grand old company, with nearly 200 years in existence. While the company started out as Thomas Cook & Son in 1841, it became the world-renowned travel agency through a series of mergers and acquisitions along the way, over this 200-year period. However, in recent years, the company made some strategic errors in understanding the prevailing market dynamics correctly, accompanied by some corporate mis-adventuring, which landed it in its current state of financial turmoil. It is worth mentioning here that while Thomas Cook Group is so deep in debt, the closest competitors of the company in United Kingdom- TUI Travel and Jet2 Holidays- have reported decent financial performance during the year. Thomas Cook ranks third largest in terms of revenue in the United Kingdom after these two companies.
However, the recent developments with the company will have little adverse effect on travelers as their pre-booked holiday packages are well protected under the ATOL scheme and will go ahead as promised, and for the travelers who are already on tour abroad will be able to get suitable alternative arrangements to return home, the arrangements for which are in full swing in collaboration with the Civil Aviation Authorities of the United Kingdom.
It is estimated that nearly 600,000 British holiday makers may be stranded on different locations around the world at the time of the breaking of the story. The operation to bring back bring back British passengers will be the largest ever peace time repatriation operation in United Kingdom’s history.
The development however has also meant loss of employment of thousands of Thomas Cook group employees both in the United Kingdom and abroad. The vendors of the company and the hotel owners now face an uphill task to recover their dues from the company and there is also the case of thousands of other people who indirectly benefited from the company’s operations worldwide who would now be worried about their future as well.
The most relieved lot, however, would be the bond debt holders in the beleaguered company who were desperate to recover their funds and were favoring liquidation . The consensus among analyst was that, even if the Chinese parent company was to pump in additional funds it would have only delayed the inevitable, and the company would still be struggling to make good on its debts on the due date.
The bondholders most of whom had bought credit default swap instruments, as insurance to safeguard the debt given to the holiday maker and would help them escape unscratched if the company went into liquidation, as it will trigger encashment of the credit default swap instruments, ensuring a recovery on their dues.
The lessors of aircrafts to Thomas cook airlines have also stated the process to re-possess their leased aircrafts from the company, as all the associate companies of Thomas Cook group will go into liquidation with the parent.
The company’s business is bifurcated into two divisions, tour operations and airline operations. While the tour operations segment of the company was not doing well, the company’s airline business though, was in good shape and the only bright spot in its folds. This deal, should it have materialized, would have seen the control of the airline getting transferred to Fosun International Ltd. The airline has a fleet size of 46 and operated to 105 leisure destinations worldwide. It operated from 10 bases across England and has an IATA call sign “THOMAS COOK”. The company, though serving mostly to Thomas Cook customers, had operational efficiencies comparable to that of any large, low-cost, European airline.
The company had the opportunity to get rid of a significant part of its debt in early 2019, when it had received bids for its profitable airline business which was not entertained then. However, a last-minute effort in September 2019 to sell part of this business did not find any enthusiastic response and has triggered a collapse of this business as well as that of its parent.
The deal, to recapitalize the company and breathe a fresh lease of life to it, would have helped restore it to its former glory as a successful tour operator, compared to its closest two competitors. The deal would not have been jeopardized had the management taken timely decisions to hive off its profitable airline business, ensuring survival of both the entities.
There is a lesson to be learnt for all investors who are seeking market-beating returns by investing in a distressed asset. They must make sure that there exists a slim but realistic chance of a turnaround. Moreover, before committing any financial resource, they must ensure that they have taken all possible safeguards.
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