Having sat on the fence for a while now, I have, somewhat belatedly, come off it and shorted a few Thomas Cook (TCG) at 13p. Last time I did this was in November 2011 when it was in a similar predicament but was bailed out by direct intervention from David Cameron, who effectively ordered the recently nationalised bankers not to pull the plug. Sadly, for shareholders this time round, I suspect that Theresa May has more on her plate right now than bailing out the company a second time...
It is looking increasingly like the equity will end up all but worthless. As a rule of thumb, the bond market is much more reliable at pricing risk than the equity market and Thomas Cook debt trades at around 40p in the pound. With the equity 'worth' close to £200 million clearly one of the two has got it horribly wrong and as usual it is likely to be the latter.
The company is effectively now in fire sale mode and prospective buyers are not likely to be in any mood to pay up for its assets. At the end of March shareholders funds were negative £1.3 billion and that’s including £2 billion of intangibles which are probably overstated despite recent write-offs. In this climate, net debt of £1.2 billion is clearly unsustainable and even if it is able to flog the airline and other bits and pieces a balance sheet restructuring is all but inevitable. Whether this is achieved by a deeply discounted rights issue or a debt-for-equity swap, or, most likely, both, the shares will suffer massive dilution which will leave them nowhere near to the current valuation.
As for the notion that 18% holder Fosun will ride to the rescue by bidding for the group, it is no more than wishful thinking. If Fosun wants to protect its investment it need only approach the debt holders who would bite its hand off for 60p in the pound. The shares are a sell and, for the brave, worth shorting here.
Filed under: Thomas Cook, Canadian Overseas Petroleum, Netcall, Hotel Chocolat, AFH, Rosslyn
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