Thomas Cook Group plc (LON:TCG) jumps after it announces a £1.5bn restructuring plan, including a £300m rights issue.
The recent turnaround story at Thomas Cook Group (LSE: TCG) has been pretty spectacular. The shares crashed in 2011 from £2 to 15p, and the press was filled with stories speculating on whether the company would go under.
The shares were still trading as low as 20p as recently as last November. However, with a new management team in place and a credible recovery plan already bearing fruit, the shares have soared in the last six months.
Today, after issuing its latest half-year results and unveiling a £1.6bn refinancing plan, the shares jumped a further 9% to 157p.
Overladen with debt
The story of how Thomas Cook got into trouble in the first place is, sadly, a fairly familiar one. Before the financial crisis, it was trigger-happy on the acquisition front. Consequently, it was far too indebted to cope with any significant downturn in its business.
Despite a number of disposals, the company still had net debt of £1.2bn as at 31 March 2012. Today's refinancing plan sees this reduced by raising £400m from investors, and reorganising its borrowings so that they do not have to be repaid as quickly.
On the equity front, £120m is being raised by a placing of new shares at 137p, but the bulk of the money will come from existing shareholders, who can subscribe for a 'two for five' rights issue at 76p.
Turning to debt, 500m euros will be raised from bonds that mature in 2020, with the balance coming from a new revolving loan, and bonding facilities expiring in either 2015 or 2017.
Of course, there is little point refinancing your company if underlying trading is not improving. Thomas Cook's half-year results show some decent progress on that front.
Underlying profit improved by £60m, with gross margins increasing by just over one percentage point. Free cash flow came in nearly £200m better, thanks to better working capital management.
Despite this, the company still posted a £300m loss for the period on £3.2bn of sales. With two-thirds of its revenues coming in the second half of its financial year, this is an exceptionally seasonal business.
Summer bookings are running just ahead of last year, though, despite a capacity reduction of 7%. Selling prices are up 4% in the UK and 1% in Continental Europe. Thomas Cook says it has sold 60% of its capacity for this summer, two percentage points ahead of where it was last year, and this should bode well for selling prices for the remainder of the season.
The rights issue and placing will add around 500m new shares to the 900m already trading, meaning the company should be valued at around £2bn once the shares begin trading "ex rights" in early June. With just over £100m in post-tax profits forecast for the year to September 2014, that looks reasonably pricey, but you would expect to see further improvement in profit margins going forward.
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> Stuart does not own any shares in any company mentioned above.