April 23, 2019 / 3:11 PM / a year ago

Breakingviews - Thomas Cook survival relies on risky breakup

A Thomas Cook Airbus A321-200 airplane takes off at the airport in Palma de Mallorca, Spain, July 28, 2018. REUTERS/Paul Hanna

LONDON (Reuters Breakingviews) - Thomas Cook’s best case may be a risky breakup. The struggling tour operator’s shares jumped around 16 percent on reports of a bid by Chinese group Fosun International or private equity firms KKR and EQT Partners. Either could involve selling off its airline, a tricky move that may leave an even weaker core business.

The boom in budget airlines and online bookings, Brexit, and a hot summer causing British punters to stay home have cast a cloud over the world’s oldest travel company, founded by a carpenter in northern England in 1841. Profit warnings and rising debt have caused Thomas Cook shares to lose 80 percent of their value in the last year.

Both a private equity or Chinese acquirer would probably mean radical surgery. Thomas Cook’s business includes a tour operator, an airline and a hotel unit. A buyout group might think it can flog off the parts for more than the current market value. Club Med-owner Fosun, meanwhile, would run up against European Union rules on airline ownership, and is probably interested mainly in the tour business.

Assuming a similar multiple to easyJet, Thomas Cook’s airline might be worth nearly 2.3 billion pounds, based on last year’s underlying earnings before interest, tax, depreciation, amortisation and rental obligations of 456 million pounds. That compares to a group enterprise value of 2 billion pounds, using the most recent December net debt figure.

Still, a quick sale won’t be easy. European airlines are struggling with overcapacity and weak demand. Potential bidders like Deutsche Lufthansa may face scrutiny from competition authorities. And Berenberg analysts reckon that Thomas Cook’s planes need updating. Moreover, once the airline is sold, Thomas Cook won’t be able to bundle up tours and flights, putting it at a disadvantage to rivals like Germany’s TUI. The potential acquirers will be wary of paying too high a price for the rump.

Thomas Cook’s bondholders seem less sanguine than shareholders. Yields on a 750 million euro bond due in 2022 fell on Tuesday but are still around 16 percent, while the group’s credit default swap spread is a lofty 1,200 basis points. That implies a more than 60 percent chance of default over the next five years, according to Refinitiv data. Shareholders cannot hope for too sunny a destination.


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