Thomas Cook (LSE: TCG) rose almost 20% at the end of last week as Chinese investment firm Fosun snapped up a 5% stake in the travel group. I hope foreign investors also see the merits of investing in such distressed assets such as Sirius Minerals (LSE: SXX) and Gulf Keystone Petroleum (LSE: GKP)!
Thomas Cook
Thomas Cook is a strategic asset in an industry that needs consolidation, but Thomas Cook wasn’t desperate to raise funds after a comprehensive restructuring of its debts took place a couple of years ago. Of course, this is a very different story from Sirius Minerals and Gulf Keystone Petroleum.
Thomas Cook is finding it difficult to grow, but it has a strong brand and a leading position in the travel industry. To Chinese investors, it brings much-sought recognition, among other things. Moreover, it has assets to sell — it is reportedly looking to sell its airline business — and although its shares look fully priced right now at 141p, extraordinary corporate activity such as disposals of less profitable assets could provide a fillip to its valuation, adding 15p to 20p or so.
Gulf Keystone Petroleum & Sirius Minerals
I am not sure why anybody would invest in Gulf Keystone Petroleum right now. In a way, it reminds me of Afren, although until the end of last year Afren was a much more promising, bigger and diversified oil company — one with a very stretched capital structure, sadly for its shareholders. Gulf Keystone Petroleum has a similar problem: it needs funds to continue to operate as a going concern. Estimates that put additional funding at up to $200m seem reasonable. As I argued in early February, when the stock traded around its current level, recent developments do not bode well for shareholders.
Elsewhere, Sirius Minerals, a potash development company with a market cap of about £150m, generates no revenue and is burning cash fast. More bad news: its fortunes hinge on one single development, which is pending approval. One may argue that if the group receives planning permission for its York potash project then Sirius Minerals could become a more attractive investment proposition, but I doubt there’s merit in such a view: in this market, plenty of distressed assets can be had on the cheap.
Furthermore, Sirius Minerals will need to find more capital to invest in its operations if it receives the green light for its potash project, so it will likely end up teaming up with a larger player or being owned by a larger commodity house. At what price, though? That’s hard to say.
The shares are down 76% since the highs they recorded in 2011, and the commodity landscape has become much more challenging these days: it’s likely that any bid will emerge later this year after the stock has come under more pressure, in my view.