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Tuesday, November 22, 2011

The Thomas Cook Affair

Today Thomas Cook announced the following:

"Thomas Cook Group plc announces that as a result of deterioration of trading in some areas of the business in the current quarter, and of its cash and liquidity position since its year end, the Company is in discussions with its principal lending banks with regard to its facilities during the seasonal low period of cash in the business.

While the Company currently remains in compliance with its financing covenants, it also intends to seek agreement from its lending banks to adjustments that will improve its resilience if trading conditions remain difficult.

As a result, the Company will delay its announcement of its full year results until these discussions are concluded.  The Company expects to report a headline operating profit for the year ended 30 September 2011 broadly in line with previous guidance."

Thomas Cook is now in the process of renegotiating the terms of its £1BN net debt burden for the second time in a month.

These discussions (with a syndicate of 17 banks) come a month after the company agreed a deal with lenders, that it hoped would end speculation over its future.

This announcement is more than a "tad ironic", given that on 29 September 2011 Thomas Cook in its Pre Close Trading Update stated:

Many of our businesses have performed well this year, notably Northern Europe, Central Europe and our German airline. However, our overall performance has been impacted by our UK business and the disruption in the MENA region, particularly on our French business. Summer booking trends in our key markets have remained largely in line with expectations since we last reported.

• Underlying operating profit expected to be broadly in line with market expectations;
• Cashflow performance is strong;
• Variety of measures underway to strengthen the balance sheet;
• Actions underway to increase UK cost base flexibility as part of the overall UK business review.

Trading and cashflow performance

The Group delivered steady results for July and August, in line with our expectations, but September has been a more challenging month, particularly in our French business. However, we still expect to deliver a result broadly in line with market expectations.

Our focus on cashflow continues to deliver benefits, with a £78m improvement in free cash flow for the 11 months to 31 August 2011, driven by lower capex and cash exceptionals and good working capital management. As at the 28 September 2011, we had circa £830m headroom of available cash and committed bank facilities

The company has lamely issued a string of profits warnings over the last 18 months, blaming everything from government cuts to the Arab Spring for unexpected hits to its revenues.

Unsurprisingly, the shares have fallen off a cliff from above 40p yesterday to around 14p at the time of writing.

It is clear that whatever arrangements Thomas Cook might (and that is not at all certain) be able to make wrt future funding, the fact that this announcement has caught everyone out by surprise has brought its continued existence into doubt:

1 Markets don't like being surprised.

2 Shareholders will quite rightly question the competence of the board.

3 Customers will avoid the company like the plague.

It seems that Thomas Cook has become the private sector's version of Greece!

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