The tangible benefits of intangibles

IT WAS IMPOSSIBLE to avoid the story of the struggles of Britain’s oldest tour operator, Thomas Cook. On the 22 November, Thomas Cook Group announced it was close to breaching banking covenants and, for the second time in a month, the group needed to ask lenders to bail it out. The share price collapsed, dropping from 20p at the start of the day down to 10.2p by the close of trading. The Royal Bank of Scotland agreed to lend a large proportion of the additional £100m of debt agreed between Thomas Cook and its other three main lenders and TCG’s shares have since partially recovered from the initial drop.

There is still a great deal of concern for what this will mean for the travel group in the long-term. Thomas Cook’s debt, close to £2bn, is around three times its operating profit excluding pension liabilities, estimated at £274m. Thomas Cook announced in August that, over the next 18 months, the group was looking to generate as much as £200m in the sale of tangible assets such as hotels and office buildings but has it overlooked the unlocked potential in its intangible assets?

The group could tackle its massive pension deficit through the use of non-cash asset pension funding. With such a huge pension deficit, reducing it could improve consumer confidence and guarantee the position of employees and trustees should it face insolvency. Thomas Cook’s brand is still a powerful one and it holds claim to being the oldest travel operator in the UK. The group could separate off its strongest brands, creating a pension funding partnership (PFP) and transferring those assets into special purpose vehicles. The brands can then be leased back to the company for a fee, allowing them to stem the gap in their pension deficit and offering security for lenders. Using intellectual property such as a brand for such a scheme can be particularly effective as they are often easy to separate from the company and, unlike tangibles, are not often already used as bank security.

TUI Travel, one of Thomas Cook’s main competitors, announced in May 2011 that it would be using its Thomson and First Choice brands as a security to fund its pension scheme. On 5th December, TUI announced a net profit of £85m for September 2010 to September 2011, up from a loss of £123m for the previous year. Though this success has not come solely through TUI’s new pension scheme, it was certainly a strong factor. Creating a PFP allowed TUI to draw on existing assets to decrease debts and gave the company space to instead focus on restructuring other aspects of the company.

Even though Thomas Cook has seen share prices recover somewhat, the future of the group remains uncertain. Whilst the pension deficit represents only a fraction of company debt, the success of TUI since it implemented its pension scheme could act as an incentive for Thomas Cook to make a similar move.

Stuart Whitwell is managing director at Intangible Business, a brand valuation consultancy

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