Sharp fiscal deterioration due to the challenging travel and tourism market environment has really clobbered Thomas Cook (LON:TCG). The company’s share price has slipped from its 12-month peak of 146.10p [16 May 2018] to 26.94p a session prior to the time of writing [26 April 2019]; a staggering drop of 81.6%.
Such has been the extent of the decline, that the world’s oldest tour operator now appears vulnerable to takeover. Various media reports, circling since 23 April, have named private equity group KKR, buyout firm EQT Partners and Chinese billionaire businessman Guo Guangchang’s Fosun International to be among the interested parties.
Fosun, which already owns a 17% stake in the company, upped it to 18.1% on Monday (29 April). Thomas Cook declined comment on reports of suitors, but what it can’t deny is the inescapable decline in its fortunes that have forced it to put its airline business up for sale, close stores in February, and issue two profit warnings.
While speculation is rife among investors that Thomas Cook might need to raise funds, the company admits it intends to streamline operations and focus on its core holiday business. Rating agency Moody’s urges caution. On 26 April, it downgraded Thomas Cook's ratings to B3 and placed it under review for downgrade.
The downgrade included Thomas Cook’s corporate family rating (CFR) to B3 from B2 and its probability of default rating (PDR) to B3-PD from B2-PD. The agency also downgraded to B3, from B2, the rating on Thomas Cook's €750m senior unsecured notes due 2022, and downgraded to B3 from B2 its €400m senior unsecured notes due 2023 issued under Thomas Cook Finance 2 plc.
"The rating action reflects our concerns over the company's ability to recover its credit metrics after the sharp deterioration in fiscal year 2018 due to the ongoing challenging market environment. We expect further negative free cash flow generation this year to pressure already weakened liquidity," says Martin Hallmark, Senior Vice President and lead analyst for Thomas Cook at Moody's.
A sale of Thomas Cook's airline business has the potential to improve the group's liquidity, however the execution risks for the sale are high, and valuation and timing remain uncertain.
After the weak first quarter of fiscal 2019 reported by Thomas Cook, as well as further evidence of a challenging market environment in the tour operator business, Moody's has revised down its base case expectations.
The agency anticipates only a minor margin improvement in the coming 12 to 18 months and negative free cash flow generation in fiscal 2019, before Thomas Cook can potentially reach cash break-even in 2020. Furthermore, Moody's expects the EBITA / interest expense coverage ratio to remain below 1.25x in the next 12-18 months and the group's liquidity to deteriorate with very limited covenant headroom.
Given the potential for takeover, despite lacklustre financials, predicting where Thomas Cook’s share price goes from here is challenging. Unsurprisingly, since news of a takeover has emerged, many analysts and brokers have maintined a hold rating. However, City price targets, issued prior to the emergence of takeover rumours, range from 12p (Berenberg) to 27p (UBS), and are nothing to write home about.
Opportunistic buying in light of takeover chatter is inevitable. But perhaps holding levels for now might well be the right call, especially if you bought in the summer of 2018 and have had to contend with an almighty slump in Thomas Cook's fortunes.
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Gaurav S.