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Thomas Cook becomes potential takeover target as market value plunges after fresh profit warning

Analysts see Chinese group Fosun, which owns 17% in Thomas Cook, as a possible bidder for the under-pressure British tour operator

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Thomas Cook has issued three profit warnings in less than a year

Thomas Cook Group PLC (LON:TCG) could become a potential takeover target as its market value has slumped by more than 87% over the past year following a series of profit warnings.  

The oldest travel company in the world already has plans to sell its airline business and is considering the disposal of its foreign exchange arm, Thomas Cook Money. But the company still needs to address the recent underperformance of its core tour operator business, which on Thursday saw first-half revenues drop 4% on a reported basis and 91% on a like-for-like basis.

READ: Thomas Cook shares tumble as it posts wider first-half loss and warns of weaker second-half

Thomas Cook said there was “little doubt” that Brexit uncertainty had caused customers to delay their summer holiday plans as it posted a loss before tax of £1.5bn for the six months to March 31, up from £303mln a year ago.

The latest results sent the group’s shares down 17% to 18p, brushing the lowest level since 2012.  A year ago, the shares were trading at around 146p a piece, but three profit warnings in less than a year have dragged on the stock.

A prolonged summer heatwave in Northern Europe last year has not helped matters but it is one of many problems facing the business.

A weaker pound following the 2016 Brexit vote, growing competition from smaller online rivals like On the Beach Group PLC (LON:OTB) and Airbnb, overcapacity in the European airline sector are other issues dampening consumer demand.

On top of that, discounting and higher fuel and hotel costs have dented profits.

Could Chinese shareholder swoop in with a takeover bid?

“The question now is whether c17% shareholder Fosun simply decides to come in and take it over – once the airline is sold a major obstacle to the Chinese group making a bid will have been removed,” said Neil Wilson, chief market analyst at Markets.com.

“An approach may well be in the offing.”

Wilson said the biggest worry for Thomas Cook is that net debt has ballooned to £1.25bn.

The company has secured a £300mln bank facility to provide additional liquidity for the winter 2019/20 season but this is subject to the sale of its airline business. 

Thomas Cook said it has received “multiple bids” for all or part of the airline unit, which consists of Germany’s Condor, as well as British, Scandinavian and Spanish operations.

Lufthansa has said it would make an offer for Condor with an option to buy Thomas Cook’s remaining airlines.

Selling Condor 'no silver bullet'

“The loan buys it time to flog the airline without it becoming a distressed purchase. But selling Condor is no silver bullet,” Wilson said.

“For sure Thomas Cook needs to see a good summer season to try and offset a miserable winter, but struggling under substantial debts and with structural headwinds combining with cyclical weaknesses in some markets, it’s still a very bumpy journey ahead.”  

The group has sold 57% of its summer holidays for this year and tour operator bookings are down 12%. The poor summer trading was largely a result of weaker demand in the UK, Germany and Sweden.

Thomas Cook now expects underlying earnings (EBIT) in the second half to be behind the same period a year ago.

Emergency fundraise speculation 'likely to ramp up'

AJ Bell investment director Russ Mould said: “Times are tough for travel operators at the moment and the problem for Thomas Cook is that its ability to navigate a difficult market is hindered by its unwieldy borrowings. Little wonder the company is in a tailspin and descending to new record lows today.”

Mould said speculation over an emergency fundraise, which mounted at the end of 2018, is only likely to ramp up despite the company’s plan to sell its airline operations.

Alternatively, he questioned whether Fosun might step in with an offer to buy the group.

Senior market analyst Fiona Cincotta at cityindex also thinks a takeover bid could be in the offing.

"The pressure on Thomas Cook to execute a major asset sale has been turned up a few notches with this dismal result,” she said.

Adding: “About the only real positive news in today's update is that Thomas Cook has received multiple bids for its airline business. But with losses mounting and a new £300m financing package contingent on a successful sale, management is looking more and more like a forced seller -- and that can't be good for maximising bid prices."

Quick facts: Thomas Cook Group

Price: 3.451 GBX

LSE:TCG
Market: LSE
Market Cap: £56.64 m
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