Thomas Cook axes dividend in move to rebuild finances

Thomas Cook said it won’t pay a dividend until it has sorted out its finances.

Europe’s second biggest tour operator is scrapping its dividend following a string of profit warnings, although it is confident of a deal with lenders ahead of a key test of its financial health in December.

The company, whose chief executive stepped down in August, said it is looking to cut its debt substantially over the next two to three years.

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It recently announced a series of measures to turn around its UK business, including plans for the closure of 24 of its 800 retail stores and a reduction in its airline fleet from 41 aircraft to six in order to meet capacity.

Consultations with staff are under way and Thomas Cook said it expects to give more details about its plans with full-year results on November 24.

It warned it will not make any dividend payments whilst it attempts to rebuild its balance sheet.

The tour operator is battling weak sales as a result of poor consumer confidence and disruption caused by the unrest in North Africa.

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Thomas Cook faces a test of its banking covenants in December – at a time when its cash inflow is usually weak because it is a quiet time for bookings. Finance director Paul Hollingworth said the company is negotiating a new agreement which would include relaxing the criteria for the test.

“The primary thing is making sure we are building in substantial and sufficient headroom in terms of covenants that people stop asking the question,” he said.

The group expects to secure a deal by the end of October.

Under the current criteria, Thomas Cook’s net debt must be no more than 3.75 times EBITDA.

People can do their own calculations and work out it could get tight,” said Mr Hollingworth.

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Peel Hunt analyst Nick Batram welcomed the moves. “Management does appear to have grasped the enormity of the issue and has made a number of steps in the right direction,” he said.

Thomas Cook shares have lost nearly 90 per cent of their value over the past 18 months.

They closed up 5.66 per cent at 39p last night.

The company has started a disposal programme to bring down net debt which stood at £1.1bn in March. It said it had raised £40m of its targeted £200m proceeds from disposals.

Mr Hollingworth declined to rule out the possibility of the company reverting to a rights issue to bolster its finances, adding he did not expect to pay dividends in the short term until the balance sheet was in a “far stronger position”.

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Thomas Cook said it expects underlying operating profits to be broadly in line with expectations.

It said results in July and August had been in line with expectations, but September had been more challenging, particularly in its French business.

The company is feeling the effects of tough trading conditions in the UK, as its core customer base of families with young children has been hit hard by tough economic conditions.

It said in July earnings before interest and tax (EBIT) would be around £320m this year, compared with a forecast at the time for £380m. The forecast for 2011 EBIT is now £315m.

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Mr Hollingworth said he would consider a similar performance in 2012 to be a very good result.

Thomas Cook said that the current summer season has been sold in line with capacity, but winter 2011 bookings have declined by seven per cent in the UK, six per cent in central Europe and 16 per cent in western Europe, which includes France.

To compensate, the group has cut capacity by five per cent in the UK and by 35 per cent in France but has increased it in northern Europe to reflect growth in that market.

Rival TUI Travel, Europe’s biggest tour operator and the owner of the Thomson and First Choice chains, said last week it is on track to meet full-year profit expectations.

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