Thomas Cook Group Plc’s bonds rallied but its shares fell after China’s Fosun Group said it may help fund a 750 million-pound (US$940 million) rescue of the ailing UK travel firm that would heavily dilute its stock.
The deal will give the Asian insurance-to-drugs conglomerate control of the British company’s tour operations and a minority stake in its airline, while swapping debt for equity and issuing new shares, Fosun Tourism Group said in a statement Friday.
The talks are advanced, with the money set to provide liquidity to trade through the winter season, according to the London-based company
The talks are advanced, with the money set to provide liquidity to trade through the winter season, according to the London-based company. A takeover of a tour operator with roots dating back to 1841 would mirror Fosun’s acquisition of Club Med, the resort chain it bought in 2015 and has boosted partly by bringing in more Chinese tourists.
“Fosun is hoping that Thomas Cooks’ brand name and global reach will expand its business among wealthy Chinese tourists,” said Andrew Collier, managing director at Orient Capital Research. “Bondholders are expecting this synergy to work, otherwise they wouldn’t convert debt to equity.”
Cook’s bonds jumped as much as 18% on the news, with its 6.25% notes due June 2022 advancing as much as 6.15 points to 40 bid in early trading. The shares fell 46%, the most since 2011, before trading 41% lower as of 8:28 am in London, taking the decline this year to 75% and reducing the company’s market value to 120 million pounds (US$144 million)
Thomas Cooks margins have been shrinking amid intense competition and stuttering European vacation market as more people consider holidaying at home following last summer’s heatwave. Tour operator bookings are down 9% for summer, with airline bookings sliding 3%, and the company said it expects a decline in second-half operating profit.
Fosun is hoping that Thomas Cooks’ brand name and global reach will expand its business among wealthy Chinese tourists
Andrew Collier, managing director at Orient Capital Research
A deal would require agreement from stakeholders and regulators, the company said. Thomas Cook said its main lenders are supportive of a recapitalization and discussions are “constructive.”
Fosun already owns about 18% of Thomas Cook, and protecting that stake may also have played a part in its owner, Guo Guangchang, agreeing to the rescue, according to Brock Silvers, managing director at Kaiyuan Capital in Hong Kong He said the deal is otherwise “puzzling” as an investment in an unprofitable business in a declining sector.
The plan won’t impact trade creditors, and though existing shareholders would be diluted they would have an opportunity to reinvest alongside Fosun, Thomas Cook said.
“While this is not the outcome any of us wanted for our shareholders, this proposal is a pragmatic and responsible solution,” Thomas Cook Chief Executive Officer Peter Fankhauser said.
Thomas Cook had debt of about 1.9 billion pounds as of March 31, according to data compiled by Bloomberg.
Thomas Cook creditors have sought to exit loans on concern the company’s declining performance would weaken its ability to repay. The agency has seen bookings and its bond prices tumble amid concern about slumping travel demand.
In May, S&P Global ratings and Fitch Ratings pushed the company’s credit score deeper into junk territory, citing high indebtedness.
In 2016, Thomas Cook and Fosun set up a travel agency partnership to cater to China’s wealthiest tourists
Thomas Cook has been grappling with a tough operating environment since last summer’s heatwave in northern Europe, with many of its sun-seeking customers choosing to stay at home. Uncertainty over the UK’s departure from the European Union has also weighed on its business.
The tour operator said in June it was in talks with Fosun about a possible deal. The UK-based tour business, which had revenue of 7.4 billion pounds last year, would significantly expand Fosun’s footprint in Europe. Taking control of Thomas Cook’s tour business would also give the group “significant synergy with Fosun’s other offshore tourism properties, including Club Med,” said Collier of Orient Capital.
A deal would reflect the renewed aggressiveness of Fosun’s dealmaking, a shopping spree that comes three years after China started reining in overseas investments by some of the country’s biggest and most indebted business groups.
In 2016, Thomas Cook and Fosun set up a travel agency partnership to cater to China’s wealthiest tourists. As the Asian country’s wealth grows, tourist zones around the world have taken steps to draw more of them, especially big-spending luxury travelers.
HONG KONG NEWS