The Co-operative Travel ‘joint venture’

Interesting things are happening with the so called joint venture between Thomas Cook and Co-operative Travel.  I say ‘so called’ as I’ve always regarded the term ‘joint venture’ to be misleading, as it seemed to me the deal was essentially an acquisition by Thomas Cook of the Co-op Travel business, subject to various conditions and spread over time.

Although the Thomas Cook and Co-operative Travel operations have been merged, there remain stores branded as Co-operative Travel, as well as many more branded as Thomas Cook.  While many of the Thomas Cook and Co-op Travel retail outlets have closed in the last couple of years, some are now being bought back into the co-operative fold.

Anglia Co-operative has acquired six branches in the Midlands – in Corby, Alvaston, Whetstone and Raunds.  All are based in Midland Co-operative foodstores and follow the acquisition of three independent travel stores by Anglia earlier in the year.

Meanwhile, five other Thomas Cook/Co-op Travel branches have been acquired by Midcounties Co-operative Travel.    These are located in Market Harborough, Hucknall, Great Missenden, Uttoxeter and Chlemsley Wood.  This marks an expansion of the Midcounties’ travel business, which has increased its branch presence to 60 stores, up from 35 just a year and a half ago.

In a statement, Midcounties said:  “Three of the new branches are already branded as The Co-operative Travel and the remaining two branches, which currently operate under the Thomas Cook fascia, will be rebranded as”

Alistair Rowland, Midcounties’ group general manager for travel, added: “We’ve demonstrated our ability to acquire and improve the performance of travel agents we have acquired in the last 18 months. The new locations are an important part of our strategy to grow our high street presence.”

There has been speculation in the travel press that Midcounties is keen to also acquire the Co-operative Travel brand name.  A spokeswoman for Thomas Cook would not confirm or deny this, saying: “We’re not able to comment on market rumour and speculation.”

However, Midcounties’ spokeswoman provided some further clarification, suggesting that the report in the travel press was misleading.  “There has been some confusion about this,” she said.  “Some of our stores are already branded as Co-operative Travel and we will continue to use that name with future acquisitions.”

There has been disquiet for the last two years across much of the co-operative movement about the original deal between Thomas Cook and Co-operative Travel, which was described as a joint venture.  In part this reaction reflected the unhappiness at the job losses and branch closures this involved.  These have come about as expected.

Thomas Cook’s spokeswoman explains: “Thomas Cook has undertaken a sizeable reduction to its retail network, and stores under both the Thomas Cook and Co-operative Travel brands have been closed, a number of which have been purchased by third parties.”

But much of the criticism was also about the terms of the deal – which was essentially designed to strip out surplus capacity in a shrinking sector.  To put this in context, the deal was announced in October 2010 after a bad year for the tourism trade.  Icelandic ash clouds had caused flights to be cancelled and holidays aborted. Thomas Cook’s pre-tax profits fell by 7.5%.

But the situation for the Co-operative Group – owners of Co-operative Travel – was close to a disaster.  Its net profits on the travel business were £7.5m in 2008.  But by 2010 these had collapsed to a mere £100,000.  The then Group chief executive Peter Marks was keen to strengthen the Group’s presence in viable sectors – which were then seen as including the bank as well as grocery, pharmacy and funerals – and the implication was that it would depart sectors where viability was difficult to achieve.

The terms of the agreement between Thomas Cook and the Group no longer seem to be publicly available – Thomas Cook indicated that they are not published on its website.  However, I made detailed notes of the contract terms when the deal was announced.

The new business was to be 70% owned by Thomas Cook and 30% by the Group.  More significantly, from the fifth year onward the Group has the option to require Thomas Cook to buy it out – and Thomas Cook has the option to require the Group to sell.  While the merged business may continue as a joint venture – and both parties stressed the intention of this being a long term arrangement – it is possible that the Group will cease to be involved from 2015.

Thomas Cook declined to be drawn on the question of whether it intends to exercise its option.  Its spokeswoman said: “We’re not able to comment on these points.”

However, it should be added that under the terms of the deal – as I noted them down at the time – even if the Group sells its stake to Thomas Cook, the latter continues to have ownership of the Co-operative Travel brand name for a further two years.  That, of course, would change if a third party acquires the brand name in the mean time.  Thomas Cook said it was unable to comment on the likely timescale for rebranding the remaining Co-op Travel branches as Thomas Cook.

In financial terms the merger has been a resounding success.  A year ago the merged company’s shares were virtually worthless.  Now they sell for about £1.60 a share – reflecting the turnaround in the company.  After a period of severe losses, the company is making a significant profit. That potentially makes an acquisition by Thomas Cook of the Co-op Group’s stake very expensive – perhaps unaffordably so.  Alternatively, it would represent a potential large scale windfall for the Group.

(The agreed sale price is four times annual profit if sold as a ‘put’ by the Group, or five times annual profit, if sold as a ‘pull’ by Thomas Cook.  Annual profit is measured by EBITDA, earnings before interest, tax, depreciation and amortisation.)

The turnaround has been more Thomas Cook than Co-op Group.  The chairman and chief executive of the merged business came from Thomas Cook, while the chief finance officer came from Co-op Travel.  (A new chief executive has since been recruited from outside.)  The most significant presence on the board of the combined business was that of the then Group chief executive.

While the Group’s CEO Peter Marks did not initially take his salary as a non-executive director of Thomas Cook, I assume that he now does so.  Thomas Cook’s spokeswoman explains: “Peter Marks is still a non-executive director.  He was appointed on 1st October 2011 and his director’s remuneration is stated on page 64 of the Thomas Cook Group’s 2012 Annual Report & Accounts as £66,000 base salary fee.  We are not able to comment further on his remuneration or whether he will continue in the position.”

Given the concerns over the crisis at the Bank and the comments made to the House of Commons Treasury Select Committee by former Bank chief executive Neville Richardson it will be interesting to see what reaction there is to the Group’s former chief executive still receiving a significant fee for his role as non-executive director of Thomas Cook.

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