City Insider: Tough times for W&O – but all is not lost

City Insider - A City perspective on the travel industry from FT journalist David Stevenson

W&O is heading for heavy losses – but beneath the top-line misery some of its business units are performing very strongly

Its a tough old business if you’re a listed travel company on the London stock market, but its especially tough if you’re really small. For W&O – Western and Oriental – last week must have been one of the worst in its short history.

This micro-cap luxury travel specialist pushed out some grisly looking numbers within days of Tui’s generally positive and well-received prelims. Out went the Chairman Mr David Howells. In came a new chairman, a certain Andrew Neil. Out went any prospect of profits for 2010 as the headline loss widened to a nasty-looking £7.8m. In came yet another strategic review to work out what to do next.

The “what to do next bit” is fascinating. The market doesn’t tend to give a damn about a micro-cap trying to get its act together, especially if it has dropped off the analysts’ radar because it’s too small. No matter how many times you tell the City your core business is trading profitably, all that most analysts will focus on is survival. And in particular there’ll be much tut-tutting about the operational cashflow numbers which show that W&O is bleeding cash at the moment.

If we strip out the accounting numbers for goodwill and amortisation and factor back in changes in working capital, W&O burnt through £1.6m last year. That in itself is not necessarily terminal, as it started the year with over £5m in the bank, helped in part by a placing of shares. Technically W&O still has just under £4m to play with, although much of that spare cash is not actually available and is tied up with contractual requirements including the commitments to the CAA and to the credit card companies.

The only obvious upside here is that there don’t appear to be any meaningful debts, so theoretically W&O could just issue some more shares. That could happen if investors thought that the underlying businesses were fundamentally profitable, but even here the news isn’t good – it has become increasingly clear that operating a luxury travel business is far from being a profitable exercise, despite all those wealthy clients. W&O’s travel business lost £457,000 last year compared to the £747,000 profit at the more established events division.

Add in central costs – which are still heavy for such a small group – and you can see why W&O is burning through that cash mountain.

But in amongst all this dismal sea of red ink, there are some optimistic highlights. If I were a much larger travel group I might even be asking my due diligence boys and girls to get out their calculators and run some numbers over the core W&O business units. At the operating level some of the businesses, especially those based in tropical hotspots, seem to be doing very well – and the events division has certainly picked itself up off the floor.

The forward order book looks good and there are crucial positives to consider. All the hard work of actually connecting up disparate back offices seems to be largely done and solid progress seems to have been made integrating all the brands. In the real world of running businesses – away from the forensic analysis of accounts favoured by analysts – this is what can make or break a company.

If you can build a brand and take a scythe to overhead and back office costs, you’re half way to building a robust business. And W&O seems to have done most of that hard work judging by these recent numbers. All it needs now is a quiet 2011 (fat chance!) and a push to expand revenues. Sadly I have a nasty suspicion that this won’t happen.

Back in the square mile, investors have lost a lot of money in W&O and they’ll be keen to contain the losses. A quick action remedy could mean selling the crown jewels – assuming there are any – and closing the bits that looking frightening in cash flow terms. That could represent opportunity for a larger company willing to chance their arm with an opportunistic bid for a core business.

But any price on the table is likely to be impacted by that operational cashflow problem – any buyer only needs to wait for the money to run out and the investors to rebel, and then they can pick everything up for next to nothing.

All of which leaves the new exec team with some difficult choices. The sensible thing would be to recapitalise, raise some more money and see through the operational integration. My money would be on leading investors taking the whole thing private or selling to managers, leaving them with a small cash shell which could no doubt be turned into a racy African or Brazilian resources company.

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