(Bloomberg Opinion) -- The holiday’s over for investors in Thomas Cook Group Plc. Shares in the British company, one of the world’s oldest and best-known travel operators, fell 40 percent on Friday after analysts at Citigroup Inc. said the stock was worthless. They fell another 16 percent on Monday. This appears to be headed only one way for long-suffering equity holders.
The crisis of confidence comes after Thomas Cook made a cautious statement about its profit last Thursday. It also acknowledged uncertainties about selling its airline, which would bring in much-needed financing, and raising 300 million pounds ($383 million) of extra funding from its lenders to see it through the slow winter period.
The situation could be made even worse by credit card companies retaining more of holidaymakers’ payments from the group, something they do to make sure people can be reimbursed if a travel group gets into difficulties. This would put more pressure on its short-term cash flow. Thomas Cook has been in discussions with its suppliers over the past few days to reassure them about its financial position.
Even if the company does find a buyer for its airline – a very big if – and secures the extra funding, it can’t keep living hand-to mouth. It needs a longer-term solution to its borrowing crunch. Net debt stood at 1.3 billion pounds at March 31. True, this should start to fall as the group receives holiday payments, but the Citi analysts estimate that net debt will still be 740 million pounds at the end of September. That exceeds the combined value of its tour operator and airline divisions.
Thomas Cook doesn’t have many options left. Trading its way out of its problems looks unlikely given the recent penny-pinching by British consumers. And all of the newspaper headlines about the company’s plight won’t exactly have holidaymakers rushing to book with the operator.
It would have been far wiser to raise equity back in 2016, when Thomas Cook had brought down its debt and reinstated its dividend. It could still do so now, but with the share price under so much pressure, a rights issue would be a serious challenge. Similarly, the bonds have sunk, making the issuing of new debt prohibitively expensive.
The latest slump in the shares (to 9.9 pence on Monday) indicates that there’s little value left for shareholders, including China’s Fosun International Ltd., which has increased its stake to 18 percent. A debt-for-equity swap, as I’ve noted before, is looking more and more probable. Under this scenario, holders of the bonds would swap their positions for equity in the business. That would let the company get on a firmer footing, potentially by leaving the public market.
Little wonder that distressed debt investors have been taking stakes in the company’s bonds, according to the Financial Times, to give themselves an advantage ahead of any restructuring. Despite its woes, Thomas Cook does have some decent assets such as the airline, as well as the historic brand and the tour operator business. These might be attractive to a hotel group or online travel provider.
Given the seasonal nature of the business, the company would want to hold off from any restructuring until payments for this summer’s holidays have come in and debt is at its lowest point. Still, with little improvement in trading on the horizon, that’s a luxury Thomas Cook might not have.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
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Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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