Casting The Lifeline

John Foster: MyTravel was in a poor financial state when you joined. It had seen the backs of three CFOs and was on its third profit warning in 12 months. What made you want to jump into such a hot seat, especially considering you were approaching the end of a successful and high-profile career?

John Allkins: It was a very, very hot seat. They did have a number of profit warnings and had gone through several finance directors. I had left Equant in July 2003 and started talking to MyTravel in September of that year. At that time they were talking about losses of £200m. The day I joined in December, MyTravel announced an annual pre-tax loss of £910.9m. The operating loss was £358m, so underlying this were a lot of write offs, exceptional charges and other losses.

How did the losses get so bad and why did they increase so spectacularly at the close of 2003?

They had developed a ‘black hole’, caused by a loss of control over the accounts. In effect, these were items that were not recognised – inappropriate accounting treatments, values of assets and values of goodwill that are not vigorously looked at. MyTravel had this in spades. It can build up and quickly turn a £300m loss into a £900m loss due to all of the write-offs that you have to deal with.

So what remedial steps could the business take to deal with such crippling losses?

I knew about the scale of the losses before I joined. And for me to come on board, the directors agreed that we would have to implement wide and sweeping changes to combat the cash crisis.

It was simple: MyTravel did not have enough cash from operations to see the business through the winter of 2003–04 and we had to sell assets and companies.

But again, why, after a long and successful career, aged 54, would you want to join a company in such dire difficulties? Surely it would have been easier to join a company that could offer a comfortable life in the twilight of your working life?

It was the challenge and also the type of work that would be required. In my career, I had done IPOs, SPOs and M&A; but I had never restructured a balance sheet and converted debt to equity, and it was obvious from the start that this was what was needed. I wanted to tick those boxes before retiring, and I would not have gone in there if, after discussions with the CEO and the board of directors, I was not sure that the patient would be able to get off the stretcher.

How was the business organised; what was the core and what did you think you could offload?

The company had a turnover in excess of £4.4bn in 2002; in 2003, this had dropped to £4.2bn. £3.2bn was generated by our core business – travel companies, albeit in a number of regional markets. The original business was based in the UK, Scandinavia, Canada and, to a lesser degree, the US. We had lots of other businesses elsewhere in the rest of the world and a series of key assets. We had a fleet of 45 aeroplanes, which we managed to prune down to 33 by the time I left.

We also sold non-key businesses and assets, such as our car hire company, AutoEurope, in Germany and businesses in the US. We made a strategic decision to move out of the tour operating business in Germany because the German model was not conducive to the UK tour operating business model. We essentially pared back in order to focus on our core charter tour operating business.

How did MyTravel get in so much trouble?

In the 1990s, MyTravel was a hugely successful business. I was not there at the time, so this is hearsay, but I believe that it threw off a lot of cash. It could borrow a lot of money and, like many businesses in that situation, it started to believe its own propaganda. It began as a small North of England tour operator and grew by acquisition. Its biggest mistake was buying a German tour operator. You could understand that MyTravel, looking at the German market, might have thought: "OK, so they speak a different language, but they go to the same destinations as people from the UK, so we can create great economies of scale and expand into Europe at the same time." This was a major error – the differences in business models between Germany and the UK are vast and the German operator became a huge cash drain, which nearly took the group down. MyTravel did not innovate as the market fragmented, losing its way and its focus.

Now that the business has been re-engineered and trimmed down, how does the balance sheet look?

We did a debt for equity swap and by December 2004, we had converted debt with a face value of £900m to equity, giving the company a value of £600m, so we re-listed in January 2005. The business started to run more profitably in 2005, with a profit from operations of £27m in 2006, and we moved from a huge loss to a comfortable profit.

Was this simply the proceeds of selling off the businesses or a result of a reorganisation and new marketing strategy?

It was getting the operations right. Travel is a strange business in that if your turnover reduces, you make more money. It is a matter of capacity. You make money on holidays sold early in the year, and as the time of departure approaches, you make less and less money. We reduced capacity by 25% and took out hundreds of millions of pounds of costs.

Having rehabilitated the business, did you feel that the company could continue like that or did you look for a strategic partner?

When we budgeted for 2006, we realised that without a very fair wind we would not be able to make the kind of progress we needed because the UK market had changed. There was too much capacity and our brands were the weakest in the market. We realised that strategically we could not grow the business further simply by shrinking capacity, and we started to look into making acquisitions. There were two options: we could buy lots of small operators and bolt them onto our business or make one mega-acquisition.

And this is where the idea of the Thomas Cook merger came from?

Yes. In April 2006, we decided to go down the mega route. We saw Thomas Cook as the best fit and made a cash offer for its UK business on the last day of May 2006. It was not a quoted company, but its owners, Lufthansa AG and KarstadtQuelle AG, politely declined. However, we alerted them to the value of a consolidation of costs.

So what did you do then?

We had a think, and put in a cash offer for First Choice in September. This got them thinking and they decided to try and see if they could raise more money and started an auction process. We were still talking to Thomas Cook, but turned our attentions to bidding for First Choice. That said, we stopped discussions in December with Thomas Cook, as it leaked out that they were also preparing a bid for First Choice.

In January, Thomas Cook’s Chairman, CEO and CFO came to visit us in London and said they would like to do a reverse takeover of MyTravel. This gave us two options. We had to raise £1.5bn of credit to buy First Choice. The option from Thomas Cook was 52:48% in favour of Thomas Cook.

We decided that if we could strike a deal with Thomas Cook before we could finalise a deal with First Choice, we would go with Thomas Cook. Four weeks later, First Choice announced a copycat deal.

What was left to tie up?

The EU. We had to justify the deal in front of the competitive directorate and eventually got the approval from Brussels. The merger was the right option. We achieved what we set out to do and now Thomas Cook and MyTravel can forge ahead with much more confidence and strength and when I left in September 2007, I knew that I had done a good job.