The Thomas Cook Group (LSE: TCG) share price tripled to 12.3p between 30 July and 5 August. However, it’s now started falling again. As I write, the shares are down 20% and are changing hands for less than 8p.
Today’s fall came after the company revealed it will need £900m to keep operations going this winter, instead of the £750m previously reported.Â
I sincerely hope any readers who bought into the recent rally have already been selling. As I’ll explain, I expect the shares to fall much further yet.
Mystery buyer triggers rally
The sharp move upwards seen at the start of the month appears to have been triggered by news Neset Kockar, who owns Turkish tour operator Anex Tourism, has bought an 8% equity stake in Thomas Cook.
Picking up such a large stake quickly will have been unusually easy, as institutional shareholders are ditching the stock ahead of October’s planned recapitalisation. For example, heavyweight fund manager Invesco sold 9.8% of the stock between 12 July and 26 July.
New rescue plan?
Press reports have suggested Kockar is preparing a rival rescue plan for Thomas Cook. I don’t think shareholders should get their hopes up, for three reasons.
Firstly, it’s not clear if Kockar has access to the kind of funds that will be required — £900m minimum.
Secondly, Thomas Cook’s discussions with its 18% shareholder Fosun, a large Chinese corporation, are already quite advanced. Banks and other lenders are already working with Fosun and may be reluctant to start anew at such a late stage.
Finally, even if Kockar’s proposals were successful, I can’t see any reason why they would include a bid for existing stock. Lenders won’t agree to accept losses on their loans if shareholders are being bought out.
So if Kockar was going to launch a bid that included an offer to shareholders, he’d probably have to pay full price for Thomas Cook’s debt. This would add another £1.7bn to the £900m that’s needed for ongoing funding. I just can’t see this happening.
What I think will happen
Thomas Cook’s existing refinancing plan is expected to see Fosun and the group’s banks provide £900m of fresh cash in October to keep the group operating through the coming winter season.
In return, Fosun will become a majority shareholder of the Thomas Cook tour business and a minority shareholder in its airline operations.
Alongside this, the group’s existing lenders will cancel some of its £1.7bn debt, in return for a significant shareholding in the restructured business.
I estimate the value of the new shares to be issued will be at least £1.75bn, probably more than £2bn. Management has already said it expects existing shareholders to be “significantly diluted” as part of this process.
In return for such a large and risky commitment, I expect Fosun and Thomas Cook’s lenders to gain total control of the business. I’d expect them to control at least 98% of the group’s shares, after the refinancing is complete.
My sums suggest this means the stock will fall to about 2p, perhaps even lower.
In my view, the only sensible thing to do with Thomas Cook shares is to sell today. For anyone who wants to invest, I’d wait until October’s refinancing is complete and then consider buying.