Via Wolf Street

Shareholders are already toast. Would China’s Fosun conglomerate follow the time-honored principle of throwing good money after bad?

By Nick Corbishley, for WOLF STREET:

Following yet another bleak week of trading, the shares of 178-year-old British global travel & vacation-giant and airline Thomas Cook, with 21,000 employees globally — 9,000 of them in the UK — are down to 5 pence, down 96% from 130 pence in May last year. At that time, Thomas Cook Group was worth £2.5 billion. Today, its worth a paltry £75 million.

The company now has just one lifeline left: a proposed £900 million rescue deal that would see its biggest shareholder, Chinese conglomerate and investment giant, Fosun, inject £450 million in return for a 75% stake in the group tour operator and a 25% stake in the group airline. Banks and bondholders would match that amount with a debt for equity swap in return for control of 75% of the equity of the Group Airline and up to 25% of new equity in the group tour operator.

Current shareholders would be virtually wiped out by the restructuring despite the company’s reassurances that they would “continue to retain an investment in the Company.”

Thomas Cook says it needs at least an additional £750 million to pay its suppliers and tide it over this winter. That’s on top of a £300 million credit line it already took out in May. Now, the company’s creditors are asking for more.

But there are still no guarantees that the refinancing and debt restructuring deal will work. In a court filing dated August 30, Thomas Cook warned that it was running out of time to secure its future. “The serious liquidity issues within the group have led to an urgent need to complete any restructuring within September.” According to a Sky News report published on Thursday, the deal needed to secure the restructuring looked “harder and more complicated than it did a few days ago.”

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There appear to be three main obstacles:

One, a clutch of hedge funds that hold credit default swaps (CDS) on Thomas Cook’s debt are considering derailing the rescue plan in order to ensure they receive payouts on their CDS. According to Bloomberg, the proposed debt-for-equity swap, if successful, could wipe out compensation on their default insurance.

Two, Thomas Cook’s pension fund is also clamoring for improved terms in exchange for backing the recapitalization. Sources cited by Sky News said trustees of the pension fund are “seeking equity in the restructured company, funding guarantees and a commitment from the new owners to continue existing annual contributions of more than £25 million.”

Three, lenders are now demanding that Thomas Cook seek additional funding beyond the £900 million outlined last month to cover its £1.6 billion debt overhang. According to Sky, the company will need to raise an extra £100 million to close the deal.

Whether it comes up with that money will depend on how committed Fosun is to the restructuring deal. The Chinese group already owns Club Med as well as a fifth of the shares in Thomas Cook. It says its ambition is “to grow Thomas Cook China into a major brand in the China travel market” where Chinese tourists account for around 20% of tourism spending worldwide.

But the deal could be subject to tight scrutiny in Beijing where authorities have become increasingly leery of big overseas acquisitions by private Chinese companies following the recent debt-fueled crisis of big global spender HNA. Guo Guangchang, Fosun chairman, “will be left needing significant [foreign currency] debt support for a deal which won’t do much to excite regulators”, Brock Silvers, managing director of Shanghai-based investment firm Kaiyuan Capital, told Financial Times.

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This is not the first time Thomas Cook has had to resort to a rescue deal. In 2011, it tapped lenders for £200 million to avert bankruptcy. This left the company with substantial long-term debt that, to this day, eats away at the group’s profits.

In May, Thomas Cook, near collapse, posted a £1.46 billion loss for its fiscal first half, ended March 31, and issued its third profit warning in less than a year. It also unveiled a 12% slump in tour operator bookings, and a 37% rise in net debt.

Thomas Cook blames its woes on a host of factors, first and foremost a £1.1 billion write-down of the value of My Travel, a competitor it acquired in 2007. It’s also struggling in the face of fierce — and growing — competition from online operators, not to mention slumping demand for package holidays as more and more people arrange their trips themselves, cutting middlemen like Thomas Cook out of the equation.

Then there’s the continued uncertainty over Brexit, which, coupled with another unseasonably sunny British summer, was enough to convince many Brits to vacation at home this year. “There is now little doubt that the Brexit process has led many UK customers to delay their holiday plans for this summer,” Peter Fankhauser, Thomas Cook’s chief executive, complained in May. “There are a lot of holidays left to sell and there are high levels of discounting.”

Conditions for the UK’s travel industry are unlikely to get any better in the months to come. Brexit may be postponed (again!) before the next scheduled deadline, on Oct.31, further prolonging political and economic uncertainty. There’s still a possibility that the country will crash out without a deal, which could send the pound spiraling, meaning even less money for UK consumers to spend on overseas package holidays.

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For Thomas Cook’s Chinese suitor and largest shareholder, Fosun, the acquisition may seem like a gamble worth taking. After all, it’s already heavily invested in the company and acquiring one of Europe’s biggest travel agents could help it to pry open one of the world’s biggest tourist markets for China’s growing ranks of big spending holidaymakers. Alternatively, of course, it could just lose a lot more money — on the time-honored principle of throwing good money after bad. By Nick Corbishley, for WOLF STREET.

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