Thomas Cook (TCG) shares plunged 45% as Chinese firm Fosun Tourism proposed a £750 million rescue deal to save the struggling business.
Panicked investors sent shares spiralling over concerns that the business will be split in two - with the airline and tour operator businesses separated - under the proposed rescue deal and their shareholdings significantly diluted as a result.
Fosun (which also owns football club Wolverhampton Wanderers) is Thomas Cook's largest shareholder, with a 18% stake in the business. Under the deal, it would take a controlling stake in the tour operator side of the business and retain a minority interest in the airline.
The move comes after a string of profit warnings from Thomas Cook and the decision to launch a strategic review of the airline business in February 2019. Strong competition from budget airlines, a shift away from package holidays to do-it-yourself options, and increased costs have all hit the business in recent years. Brexit has not helped sentiment in the travel sector, with uncertainty over passports, as well as a slump in the pound, affecting the traditional Mediterranean beach holiday. Sterling hit a six-month low against the euro this week of €1.11 just as summer holiday season begins.
Thomas Cook said that since the start of the year the European travel market has deteriorated further, making a sale of its tour operator or airline business (for which it has received a number of approaches) at a decent price impossible.
While summer bookings are ahead of last year, Thomas Cook warns that second-half profits will likely be lower than the same period in 2018. The company said that there remains intense competition in the UK travel market and consumer spending is still subdued.
Bonds Switched for Shares
As part of terms of the proposed “recapitalisation” by Fosun, Thomas Cook bondholders will receive new shares in the business, which will significantly increase the number of shares in issue, thereby reducing the value of their holdings. Creditors will have to agree the terms of this deal and equity investors will be invited to buy more shares in the firm.
Chief executive Peter Fankhauser said of the proposed deal: “While this is not the outcome any of us wanted for our shareholders, this proposal is a pragmatic and responsible solution.”
Analysts at Citi estimate that Thomas Cook will issue £1.5 billion of new shares under the rescue deal. They suggested this in May this year as a way of salvaging the company and anticipated that the group’s airline and your businesses would be split up.
Essentially the deal means that bond investors will receive shares in exchange for their bonds in the business. Bondholders usually rank ahead of shareholders in the event of a bankrupcty, so these rights are not easily given up. AJ Bell's investment director Russ Mould says the agreement of bondholders is not a done deal: “Even the agreement mooted today does not have a clear flight path as it still needs the approval of shareholders and creditors."
Why would bondholders give up their bonds? Kames Capital fixed-income manager Mark Benbow argues that they will get a fixed amount for these bonds and that is better than waiting for the company to collapse and joining the queue of creditors.
He says that proposed capital injection will "keep the business alive as a going concern".
Thomas Cook shareholders appear to be getting a much worse deal, but they can't say they weren't warned about the company's problems. Morningstar columnist Rodney Hobson, writing in November 2018, praised the firm for being upfront about its financial difficulties, but concluded: "Try as I may, I cannot accept the argument that Cook is now a buy at a bargain price. Stay well away."
The company’s shares lost 6.27p to 7p on the news, having started the year at 32p. Thomas Cook shares were among the worst performing last year with a fall of 80% after a slew of profit warnings that knocked the share price.
Among major shareholders, Invesco holds over 13%, according to Morningstar data. Two funds managed by Mark Barnett hold Thomas Cook in their portfolios: the Perpetual Income & Growth trust (PLI) and Bronze-rated Invesco High Income.
While summer bookings are ahead of last year, Thomas Cook warns that second-half profits will likely be lower than the same period in 2018. The company said that there remains intense competition in the UK travel market and consumer spending is still subdued. Not helping matters is the weakness of the pound, which hit a six-month low against the euro this week of €1.11 just as summer holiday season begins.
