As my Foolish colleague G A Chester recently noted, the Thomas Cook (LSE: TCG) share price has been all over the place during the past few weeks as investors have tried to digest all of the news flow surrounding the business.
At the beginning of May, shares in the company slumped to a multi-year low of around 10p when speculation started to grow that the business would be forced to declare bankruptcy as its problems mounted. However, since touching the low, several interested parties have come forward to offer to buy parts of Thomas Cook, which has improved investor sentiment towards the business.
Indeed, German airline Lufthansa has been rumoured to be looking at Thomas Cook’s British and Scandinavian airlines, and the private equity firm Triton Partners has indicated that it might be interested in acquiring the group’s northern European business.
So far, neither of these potential suitors have put forward a concrete offer for the business, although they might not now get the chance to do so.
A new suitor
Over the weekend it emerged that Chinese conglomerate, Fosun International Limited, which is already Thomas Cook’s largest shareholder, has made a “preliminary approach” to buy the group’s tour business.
According to reports, Fosun is working with Wall Street investment bank JP Morgan on a potential offer for Thomas Cook and is planning to break the business up if it wins control. This plan is only in its early stages, but its already attracting controversy particularly from the transport workers’ union which has already declared that it will fight “tooth and nail” against any new job cuts if a sale does lead to a break-up.
On top of this, Fosun will have to have a plan in place to sell Thomas Cook’s airline business before it takes over the group, because, due to EU aviation rules, airline operators based in the EU must be majority owned by European companies or individuals. Fosun does not meet this criterion.
Odds stacked against a deal
In my opinion, with all these problems Fosun needs to overcome before it can make a deal, it looks as if the odds are stacked against the business. What’s more, even if a deal is announced, I reckon there’s a good chance regulators or the unions could derail the merger. There’s also the risk that no agreement comes out of the negotiations. “There can be no certainty that this approach will result in a formal offer,” the company said in today’s press release outlining the approach.
Not a good investment
Generally speaking, investing in a company just because it is a takeover candidate is not a sensible strategy as most deals fall apart at the last minute.
In this case, Thomas Cook is struggling to survive, and if the enterprise does not manage to sell itself, then the group’s future is extremely uncertain. According to analysts at Citigroup, Thomas Cook’s tour operations and the airline are worth £738m, but its debt is worth around the same, implying little if no value for shareholders if the worst should happen and the company collapses.
With this being the case, the stock looks to me to be somewhat of a gamble at the current price, and not something I’d be willing to invest in, even as bidders circle.
