Thomas Cook’s Short Sellers Get Sent on a Detour

(Bloomberg Opinion) -- Investors betting against Thomas Cook Group Plc look like they’ve encountered some turbulence. They should have expected these bumps.

Shares in the British travel group rose as much as 20 percent on Tuesday after Sky News reported that the company had received takeover approaches for its tour operating unit, and for the whole company.

Nobody should have been surprised by this. A toxic combination of unusually hot weather in Europe and Brexit uncertainty in the U.K. led to a 77 percent slump in the shares over the past year. The company had already started a strategic review of the airline. Fosun International Ltd., which could be among the bidders, has been adding to its holdings, a sign that further corporate activity could be afoot. And activist investors have been circling European consumer stocks.

Thomas Cook’s Short Sellers Get Sent on a Detour

Despite this, short interest has risen steadily this year, and is now just under 8 percent of the outstanding stock, according to IHS Markit.

It would be hasty to presume that these investors are stuck on the losing side. Any takeover or breakup of the group won’t be straightforward.

Thomas Cook’s Short Sellers Get Sent on a Detour

For a start, European Union rules requiring airlines to be majority-owned by European investors may prevent Fosun from taking control of Thomas Cook’s airline. This could have a value of more than 1 billion pounds ($1.3 billion), before any debt is attributed to the business.

Fosun could address this by teaming up with another party, such as a private equity firm, to bid jointly for the group. It could then take over the tour operating unit while its partner took the airline. But this approach would be complicated. 

Thomas Cook could also sell its airline first, then try to drum up interest in the tour operating business, which could be worth about 650 million pounds excluding debt. That would take time, and that’s something that Thomas Cook doesn’t have on its side. The company needs to address its borrowings and find a firmer financial footing. 

Thomas Cook’s debt burden is substantial, and the company said last week that it may have inadvertently breached its borrowing limits. Net debt ballooned from 40 million pounds to 389 million pounds in the year to Sept. 30, and the company has already suspended its dividend. Gross debt of about 1.4 billion pounds dwarfs the company’s 437 million-pound market capitalization. 

Thomas Cook’s Short Sellers Get Sent on a Detour

There is some logic to the timing of the bidders’ approaches. The company had a dreadful 2018, and now may be past the worst, particularly if the delay to Britain’s divorce from the EU encourages spending on holidays. It’s also worth remembering that Thomas Cook has a strong brand, and the 11 million customers a year in its tour operator division could be a useful addition to a hotel group or an online booking service seeking to build a full-service travel business.

But given the complications to a deal, the journey from preliminary interest to full takeover won’t be an easy one. Short sellers may yet end up on the right side.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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