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.
