City Insider: Thomas Cook and Chinese whispers

By David Stevenson | 16 March 2015 at 08.24 GMT

City Insider – FT journalist David Stevenson on the travel industry
In association with Travelport


David Stevenson reflects on Thomas Cook’s recent deal with Club Med-owner Fosun and foresees an upturn at cruise line Carnival

UK number two Thomas Cook has come a long way since the dark days of 2011.

Harriet Green evidently helped mastermind a classic business turnaround and shareholders reacted by bidding the business back up to a £2 billion valuation in November.

Yet since Harriet’s departure, questions have started to emerge about what happens next?

Various scenarios have circled around, including perhaps selling the airline. I always thought this was a slightly farfetched idea – why sell the one thing that allows a travel operator to leverage margins through a cycle.

Sure, it’s a capital drain, but it’s also a massive scale advantage. No surprise then, when Thomas Cook told Travel Weekly’s very own Ian Taylor: “We are definitely not desperate to sell our airline. There were no talks. There is no real news.”

What this story did highlight was a core issue about capital origination for the businesses new chief executive Peter Fankhauser.

Put simply, Thomas Cook needs to stay in the game against an even bigger competitor that has scale and open access to the debt markets in order help fund its relentless move into higher value operations.

As I’ve said many times before, that requires lots of debt funding and cheap bond terms.

Ms Green’s turnaround helped steady the nerve of the existing bond holders but beyond some savings from the various ‘waves’ of transformation, I can’t quite see where the massive dollops of extra capital are supposed to come from.

Cue the announcement last week that a two-year waiting game has finally paid off – Thomas Cook announced a strategic partnership with Chinese conglomerate Fosun.

The terms of the deal are fairly straightforward – the ambitious Chinese firm takes a 5% stake (through Fosun subsidiary Companhia de Seguros) at 125.59p, with the intention to double the holding to 10% via open market purchases.

No wonder the Cook share price bobbed up over a quarter to more than 150p a share – £92 million has found its way on to the balance sheet which should help with those all-important debt negotiations.

The next steps are potentially transformational. The two groups will now focus on Thomas Cook’s already bold plans to expand its own higher-margin Concept hotels label, as well as a new hotel fund partnership where the two businesses buy indie hotels, do them up and then Thomas Cook manages them.

Reuters reports that Thomas Cook estimates “the size of the hotel fund, in which it won’t invest, would need to be about €350 million ($384 million) to €500 million to acquire an initial 30 hotels, mainly in the Mediterranean.”

Thomas Cook reckons the tie up will enhance earnings in the financial year to September 30, 2016, assuming plans under the partnership are implemented in 2015.
Obviously, Fosun was quick to assure investors that this wasn’t the first step to buying out Thomas Cook.

But given the Chinese business’s past form with Club Med (a $1.1 billion takeover), maybe Thomas Cook’s days are numbered?

I take a slightly more cynical line. It is a good deal and would have crowned Ms Green’s legacy if it had come any earlier. But it exposes the fact that Thomas Cook needs help to access the capital required to stay global.

It means Thomas Cook’s days as a separate business are numbered and it will be forced to partner with someone else very soon. But potential bidders will be put off by the Fosun link, not least because they will think they would find themselves in a bidding war.

My suspicion is that Fosun gets a great deal. It gets its hotel fund managed by Thomas Cook and it also gets big leverage into a distribution channel for its Club Med business.

It might even convince Thomas Cook to take a stab at expansion in China, which would be foolhardy in the extreme.

Things are also looking up at Anglo American cruise giant Carnival – now shouting about its huge new ship the Britannia.

My hunch is that we are about to see a big growth splurge in the European cruise market as lower oil prices feed directly through into big profits advances for Carnival.

Guidance to analysts has been suggesting earnings per share could double and we could see return on capital hit the double digits.

Crucially, after a poor few years as a result of some rather obvious mishaps we should see above-industry yield growth as the Costa brand finally recovers its mojo and Aida in Germany powers ahead.

Analysts at UBS report that massive spending on TV advertising is having a big effect on boosting demand (without lower prices).

Talking of all things Chinese, it seems Carnival has the biggest upside from increasing demand from Asian customers not least because it’s well behind its competitors at the moment.

We can expect Carnival to ramp up supply to the Chinese market.

Surging profits and cash flows will help Carnival invest even more in new capacity for Asia which should feed back into faster group-wide growth. Watch this space as Carnival could be a big success in 2015 and beyond.

Sourced from Travel Weekly


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