Why I think the Thomas Cook share price is worth less than 1p

It looks as if the Thomas Cook Group plc (LON: TCG) share price will keep falling, writes Rupert Hargreaves.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Thomas Cook (LSE: TCG) share price is currently changing hands at just under 5p per share, a fraction of the price investors were willing to pay 10 years ago. Indeed, back in 2009, it reached a high of 250p as investors rushed to buy into this growth story. But the stock has plunged as investors have become increasingly concerned about Thomas Cook’s debt. 

At the end of its most recently reported financial period, the company had gross debt of £1.7bn, a colossal figure accumulated over the past decade, thanks to some expensive acquisitions and expensive capital allocation decisions. Now the business is seeking a bailout. Specifically, it has agreed on a £750m rescue deal with its largest shareholder, Chinese conglomerate Fosun, and lenders.

Dilution coming

As part of the deal, a significant amount of the company’s bank and bond debt will be converted into equity, substantially diluting existing shareholders. While we don’t know the exact details of the debt for equity swap just yet, the company said: “The proposal envisages that a significant amount of the group’s external bank and bond debt will be converted into equity, to be agreed following discussions with financial creditors.

Considering Thomas Cook’s current market-cap of just £73m, this suggests the share price could ultimately be worth less than 1p when the deal completes, according to my figures. 

If we assume the business converts around 50% of its gross debt to equity, the company will have to issue shares equivalent to £850m. At a price of 5p, I estimate the group will need to issue 17bn new shares to meet this target. With just 1.5bn shares in issue currently, this implies each share’s interest in the business will be diluted by more than 90%. 

This is only a rough guide and doesn’t take into account other factors, such as the “injection of £750m of new money” the firm is planning to receive as part of the deal to “provide sufficient liquidity to trade over the Winter 2019/20 season.” My numbers also don’t take into account the disposal of the airline business. 

Downside risks

Ultimately, the post-recapitalisation value of the Thomas Cook share price will depend on many factors, including the market sentiment. However, as my figures above show, the risk is skewed to the downside here. In my example, only 50% of the group’s debt is converted to equity. The final figure could be much higher than that. Besides, if the company’s troubles spook customers, its decline will only accelerate. 

So, overall, it’s very hard to see a scenario where the Thomas Cook share price is worth more than 1p when the company has completed its recapitalisation. With this being the case, I would sell the shares without delay. There are many other more attractive places to invest your money today.  

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Down 37%, here’s one of my favourite FTSE 100 bargain shares to consider

This FTSE 100 retailer's shares have collapsed in 2024. Despite tough trading conditions, is now the time to consider buying…

Read more »

Investing Articles

Which do I like best today, Nvidia or Tesla stock?

EV maker Tesla stock is on the up, while Nvidia growth is softening a bit. But they're both in the…

Read more »

Investing Articles

After jumping 15%, my favourite FTSE 250 stock looks set for the premier league

Games Workshop stock recently reached an all-time high, placing it within touching distance of promotion from the FTSE 250.

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

1 top growth stock on my Christmas buy list!

Ben McPoland reveals one top-notch growth stock down 29% that he plans to stuff into his portfolio in time for…

Read more »

Growth Shares

This FTSE 250 stock soared 9% yesterday! Is the party just beginning?

Jon Smith points out a FTSE 250 stock that leapt based on some speculation yesterday, but questions whether to get…

Read more »

Investing Articles

£10k in savings? These 2 gems could make £832 in passive income

Jon Smith outlines a couple of dividend shares with an average yield above 8% that could enhance a passive income…

Read more »

Growth Shares

This major UK bank just updated the forecast for the Rolls-Royce share price

Jon Smith talks through an analyst forecast for the Rolls-Royce share price and explains why he thinks further gains could…

Read more »

Middle-aged white male courier delivering boxes to young black lady
Investing Articles

This FTSE 100 share looks like a Black Friday bargain for me!

Our writer explains why he recently took the opportunity to buy this ultra-cheap FTSE 100 share after its 39% year-to-date…

Read more »