LONDON (Reuters) – Stricken German retailer Arcandor’s (AROG.DE) 53 percent stake in travel firm Thomas Cook (TCG.L) looks likely to be sold to either a trade buyer or a private equity group, possibly acting with its management.
Arcandor on Tuesday filed for insolvency after the German government rejected a request for state aid, effectively bringing Thomas Cook, Europe’s second-biggest tour operator, into play as a takeover target.
German retailer Rewe immediately expressed an interest in acquiring the stake in Thomas Cook and combining it with its own tourism division but would likely have to settle for being a junior partner in a merger of the two businesses.
Analysts say the only other realistic trade partner would be Switzerland’s Kuoni (KUNN.S) although the strategic fit is less compelling than a tie-up with Rewe.
“Kuoni’s strategy remains focused on upscale, tailor-made products, unlike Thomas Cook’s more mass-market-orientated products,” said Exane BNP Paribas analyst Matthias Desmarais.
A price tag above 2 billion pounds ($3.28 billion) could also prove prohibitive for the Swiss group, analysts say.
A tie-up with Europe’s biggest operator TUI Travel (TT.L) would face major, and probably insurmountable, competition hurdles as the two groups already control around half of the market across Europe.
Thomas Cook Chief Executive Manny Fontenla-Novoa said on Tuesday the group had not received any approaches and is not in talks with any groups in relation to either the acquisition of the Arcandor stake or an offer for the whole company.
However, sources familiar with the matter have told Reuters that private equity groups showed considerable interest in the company in the weeks running up to Arcandor’s insolvency.
That raises the prospect of venture capitalists linking up with its management to take the company private.
“An MBO (management buyout) is an option but is highly dependent upon credit market conditions,” said Desmarais.
Fontenla-Novoa has been adamant, however, that an MBO has not been discussed and that management focus has been on the group’s key summer booking season.
“We’ve not held any talks with VCs or banks in relation to a management buy-out,” he told reporters on Tuesday.
Blue Oar Securities analyst Mark Brumby said it could be in the creditor bank’s interest to hold on to Arcandor’s stake until conditions in the credit markets improve, making it easier for potential buyers to raise money for a deal.
“If debt refinancing were a little easier to come by, a purchase of the 53 percent stake followed by a bid would be entirely possible,” he said.
Investor interest is supported by the company’s low valuation compared with rival TUI Travel.
That is largely because the uncertainty surrounding Arcandor’s stake has resulted in the stock losing nearly 30 percent of its value since May 6 before rising 10 percent on Tuesday as bid rumours intensified.
Thomas Cook trades at 8.7 times its forecast 2009 earnings, giving it a market valuation of 1.8 billion pounds at Tuesday’s close with TUI Travel trading at 10.2 times 2009 earnings, valuing it at 2.8 billion.
Given the level of interest in an outright sale, it is unlikely Arcandor’s creditor banks would look to place the shares with institutions, some analysts say.
“This would not be in the interest of any of the parities given the likely discount,” said BNP’s Desmarais.
However, the prospect cannot be entirely dismissed since Arcandor had pledged the shares as collateral against its banking facilities and has 650 million euro of debt due to mature on Friday.
A source familiar with the matter said there had been “huge interest” from institutions in relation to a possible placing of the stake.
“We believe that a placement of the Thomas Cook shares with other investors cannot be ruled out,” said Natixis Securities analysts in a research note.
By Matt Scuffham
(Editing by Erica Billingham)