When you say the name Thomas Cook (LSE: TCG) to most of us, images of the Costa del Sol, weak sangria and long queues at the airport spring to mind. But will we be able to say that in 10 years’ time? Once the epitome of affordable holidays for the masses, the past year or so has many of us thinking instead, that this could be the end to its 178-year existence.
In many ways, the company’s problems stem from the same issues that have all traditional retailers on the ropes – people are simply moving away from shopping at bricks and mortar stores and are going online instead. With Thomas Cook, this shift in demand to the digital world has the double impact that it is easier than ever to book flights, hotels and transport separately and cheaply, which for many makes the era of package holidays extinct. It’s in this environment that the company now has to try and turn things around.
Time to sell
One of the key ways Thomas Cook is attempting to do this is by selling off some of its various operations, and so far they seem to have garnered decent amounts of interest. Earlier this month, the company confirmed it was in talks with China-based company Fosun, owner of Club Med (another relic of times gone by perhaps?) to sell its tour operator business. And in May it received a bid for its northern European business from private equity firm Triton Partners.
With all this interest, surely the company has upside potential?
Well, not necessarily, at least not the way things currently stand. As with sharks circling a wounded fish, the companies that are making these bids perhaps smell blood in the water. Thomas Cook is in dire straights, and when a company is this desperate, it may be forced to sell off assets cheap. No doubt that is what these potential suitors will be hoping for.
How bad is it?
The picture doesn’t look good for Thomas Cook. In May, the company reported a record £1.5bn loss for the first half of the year, sending its share price tumbling about 40%. What’s worse, it has also seen its credit rating downgraded by both Fitch and S&P, to B and B- respectively, taking the firm deep into junk territory and making any future efforts to raise capital more costly, if not impossible.
Coupled with this, a number of analyst ratings and comments suggesting the company may have zero value for shareholders (Citi actually giving it a price target of 0), means the firm is seeing more and more pressure build on the equity side as well. Sometimes a distressed business in these circumstances can offer the riskier investor a lot of potential, but as things stand, I think it’s just too big a risk with not enough reward.