Restraint and moderation were two characteristics that came instinctively to Thomas Cook. The Victorian-era businessman built his travel empire on the foundations of the 19th century Temperance movement, which campaigned against the consumption of alcohol and which he wholeheartedly championed. Cook set up his travel company in 1841 after chartering one of Britain’s newfangled steam trains to take 500 Temperance followers on a 12-mile journey from Leicester to a meeting in Loughborough. And he would (to coin a term that originated in the same century) be spinning in his grave on news that his creation had collapsed 178 years later under the weight of a heavy debt burden.
Thomas Cook’s final descent into bankruptcy last month is a salutary tale about the consequences of debt-fuelled M&A (in this case the legacy of its £2.9 billion merger with MyTravel back in 2007). It is also a lesson that the Chinese government has been hammering home for months in China.
As regular WiC readers will be aware, Fosun’s founder, Guo Guangchang, built his conglomerate on the back of a debt-driven acquisition strategy too. That is until the Chinese government stepped in during the summer of 2017, telling the state-owned banking sector to rein in the activities of some of the more leveraged private sector behemoths, such as Fosun, Wanda, Anbang and HNA.
Guo probably wouldn’t cite Thomas Cook the man as a source of inspiration either. Guo is rather partial to a cold beer, for instance. Earlier last year, he wrote a LinkedIn post explaining that Fosun had just spent HK$6.6 billion ($841 million) on an 18% stake in Hong Kong-listed Tsingtao Brewery because the brand meant so much to him.
As a young student with limited resources in the late 1980s, Guo related how he had once cycled from Shanghai to Beijing and back. Passing through the city of Qingdao, he skipped two meals so he could afford to down a bottle of the city’s famous beer.
Fosun’s spending spree has been diverse: other recent acquisitions include a 69% stake in matchmaking and dating website services provider Baihe Jiayuan for Rmb4 billion ($589 million) and an investment in French margarine company Saint Hubert for €625 million ($735 million).
But the colder reality is that the conglomerate is deep in deleveraging mode. This is also the main reason why it pulled back from extending additional funds to Thomas Cook after it became clear that the capital in its proposed rescue deal was not going to be enough to keep the company going.
Fosun owns 18% of Europe’s second largest travel and tour operator through various entities. In July, Thomas Cook announced that it was in advanced talks with Fosun Tourism and its creditors concerning a £900 million rescue deal. The plan was for the Chinese company to get a 75% stake in its holiday business and 25% of its airline business, with banks and other creditors holding the rest. But Fosun backed away after creditor banks decided that an additional £200 million was needed to see Thomas Cook through the winter.
When the banks balked at extending the money themselves, Thomas Cook turned to the British government in a last ditch effort to secure state aid. The appeal fell on deaf ears there too.
In fact, the government had saved Thomas Cook once before – by nationalising it during the Second World War. But this time round, Transport Secretary Grant Shapps declined, citing “systemic issues” at the travel firm.
Thanks to its disastrous merger with MyTravel, Thomas Cook needed to sell three million holidays a year just to service its debt. Writing that merger off to the tune of £1.1 billion (during its first half results) swung the group even deeper into losses. Plenty of newspapers have also pointed out that it failed to move with the times into online sales and distribution, and later struggled with higher overheads at its 563 high street retail outlets.
Fosun may yet cherry-pick some of the group’s assets including the brand name, the best of its hotels and its German travel arm. Fosun also wants to persist with its joint venture with Thomas Cook in China called Kuyi, which is currently rolling out a high-end resort in Lijiang (Casa Cook), plus a more family-focused one in Taicang (Sunwing).
Fosun says its exposure to the Thomas Cook liquidation amounts to just Rmb327 million for the carrying value of its stake and that it had never provided any financial guarantees to the tour operator.
All the same, Bloomberg reckons that the saga has served as a “reality check for the Chinese conglomerate’s ambitions to create a global travel empire via flashy acquisitions”. Fosun also owns the French resort chain Club Med, the Canadian circus company Cirque du Soleil and the Atlantis resort on the island of Hainan.
Its experience with Thomas Cook also forms part of a broader trend, where Chinese companies are showing more caution about overseas M&A. In fact they have become net sellers of foreign assets so far this year – for the first time in a decade. Dealogic figures show overseas M&A investment of $35 billion, compared to divestments of $40 billion.
While Fosun still carries a heavy debt load, it has kept its gearing below its targeted 60% level. At the end of the first half of 2019, the ratio was 53.2%, slightly down on the same time last year. Fosun has promised to maintain its Ba2/BB credit rating and says it will only pursue new deals if they are attractively valued, or provide clear synergies. High-yield debt specialist Lucror Analytics notes that it has already slowed the pace of its debt-funded acquisition strategy, balancing new purchases with divestments of older ones.
This positive message has not yet percolated through to all of the group’s stock market investors, or to the more finance-focused of China’s netizens. Commenting on an article about Thomas Cook’s demise on Jiemian.com, one social media commentator quipped that “it’ll be Fosun, which needs restructuring next”. Part of the problem is that it’s difficult to assess Fosun’s overall return on capital and its listed entities have performed relatively poorly, despite reporting much stronger earnings for the first half of the year.
Hong Kong-listed Fosun International (pharma and health, insurance, consumer goods) saw revenues hit an all-time high of Rmb68.5 billion, up 57%. Net profit was also up 11% to Rmb7.6 billion, allowing the company to pay a dividend equating to a 13% payout ratio.
Yet its share price closed Thursday at HK$9.54 (versus a 52-week high of HK$14.22). At these levels, it is trading at a steep 60% discount to its net asset value.
Fosun Tourism, which held the Thomas Cook stake alongside other tourism, travel and resorts businesses, is trading at HK$10.24 per share. This represents a roughly 33% drop from its IPO price last December, although the unit actually swung from a loss of Rmb254.5 million during the first half of 2018 to a profit of Rmb490 million over the first half of this year.
The group’s tourism operations were spun off last December as part of a strategy to improve corporate transparency and streamline its financials, while Fosun also floated Shanghai Henlius Biotech on the Hong Kong stock exchange last month.
Unfortunately, investors have been more focused on subdued consumer sentiment in China and negative headlines about some of Fosun’s other investments. Apart from its problems with Thomas Cook, there are also rumours about its stake in mother and baby website Babytree, for instance. The parenting platform was forced to issue a statement denying rumours that it was shedding 30% of its staff after reporting losses during the first half.
It also refuted speculation that Babytrees’s founder has departed for a US vaping company.
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