City Insider: Tui Travel saga has the square mile spooked

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


The fallout from the travel giant’s accounting hole just keeps growing – and the City is increasingly turned off, says David Stevenson


The financial reporting troubles at Tui Travel just won’t die down. Back in October last year the market leader stunned many in the City with the announcement that it had written off another £88m in irrecoverable balances “because of a failure to reconcile balances adequately in legacy systems”. In aggregate terms the total restatement now amounted to a whopping £117m.


The fact that these accounting issues had been rumbling on since the merger with First Choice back in 2007 was bad enough, resulting in the resignation of the highly respected CFO Paul Bowtell. Yet over the last few weeks this nasty little saga has taken some unpredicted twists and turns.


The first bolt from the blue came a few weeks back when the group announced that it had parted ways with auditors KPMG. Tui’s subsequent appointment of rival accounting firm PwC might have put an end to that affair, but the accounting press soon got hold of the story. Here’s the AccountingWeb version of the falling out:







 

A surprisingly detailed letter from KPMG explaining its decision to cease acting as auditor (a requirement under section 519 of the Companies Act 2006) reveals more. According to KPMG’s s519 resignation letter, ‘the major part of the restatement is attributable to failures in the systems and controls of the group’s UK tour operator business over an extended period of time’. The unmatched credits, the auditor noted, were the result of ‘inappropriate analysis, judgements and accounting processes undertaken by the directors’. After extensive discussions with the directors, ‘our relationship with certain directors became increasingly strained,’ KPMG noted.  


The tone of this letter is troubling from an investor’s perspective. It suggests that a) the problems had been known about for a long time and b) KPMG doesn’t see itself as wholly responsible for what may or may not have happened.


Most in the City seemed fairly sanguine back in October – many companies have to report financial restatements and the sheer scale of the numbers isn’t likely to make that big a difference to the groups viability.


But talking to investors and analysts in the square mile suggests to me that a mood of suspicion and panic is beginning to set in. “What happens if this is just the tip of a bigger iceberg?” asked one institutional fund manager.


Another market maker suggested that he’d seen volume picking up markedly in the market for shares. “There seems to be a lot of big sellers dumping small amounts of stock so that no-one thinks they’re panicking,” he noted, adding, “What’s equally curious is that there’s very steady demand for the stock from a small number of buyers”.


Within days the whole affair took an even more bizarre twist as Tui Travel’s directors announced a series of bonus payouts, including a hefty lump sum for the departing Mr. Bowtell. Cue a series of irate posts on the bulletin boards from shareholders complaining that the departing CFO was being rewarded for failure.


Flash forward a week and no-one I speak to thinks this saga is over. In particular two new concerns are beginning to crystallise. The first big worry is that accounting watchdog the Financial Reporting Council will wade in and demand that PwC ‘clear out the Augean stable and get a handle on this mess’ as one auditor put it to me.


Certainly it does seem as though this affair passes many of the tests applied for further investigation. It’s clear for instance that there were major and prolonged problems with the core legacy accounting systems. It’s also clear that the relationship between the finance team and the original auditors had broken down. If the FRC does intervene expect an announcement within a few weeks.


The other rumour – gaining ground by the day – is that Tui AG chiefs are quietly livid. Clearly this affair has not impressed the German bosses who pride themselves on being whiter than white. Maybe this is another example of why the group needs to take Tui Travel back within the fold via a buyout of the minority shareholders.


Yet in my view the biggest problem is now a reputational one. Most investors I speak to had hoped that the announcement at the back end of October would put the whole affair to rest.


Sadly for Tui Travel, new twists keep emerging – and the handling of the bonus payments isn’t the finest example of good investor relations. Perhaps someone could have quietly suggested delaying the announcement by a few months until the restatement affair had gone quiet?


If the auditing watchdogs do intervene or the German parents start shouting, the senior leadership’s credibility will slip to crisis levels, putting inevitable pressure on the share price. All of which would be a pity, as Tui Travel seems to be doing a sterling job of surviving a very tough travel market.


On a rather different note, there’s another story gaining ground in the City this week – namely that travel minnow Travelzest is finally in play. In the last few days the share price crashed below the crucial 15p support level as major shareholder Gartmore was taken over by bigger rival Henderson


The mismatch between the plunging share price and the core business, which is performing strongly by all accounts, is now obvious to all and sundry in the City. Add in the family “falling out” saga and you have what looks to me like the perfect opportunity to pick up the company on the cheap.

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