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Why the Thomas Cook share price fell 27% in August

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In the early days of August, the Thomas Cook (LSE:TCG) share price recovered from 7p to a monthly high of 12.3p, a stonking 75% gain. Rumours were flying around of a £750m buyout by its biggest shareholder, Chinese conglomerate Fosun, which would salvage some value from the distressed travel operator.

My colleague Royston Wild has covered how Turkish travel magnate Neset Kockar upped his stake to 8% in an early August buying spree. Then Thomas Cook told the market on 12 August it was in talks for a £150m cash injection from creditors that would allow it to keep trading through the winter.

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The rebound proved to be nothing more than a blip as the share price fell away, sinking 27% to an all-time low of 5.14p by 31 August. It is now clear Britain’s oldest holiday package firm fears going bust and investors could easily be left sitting on worthless shares.

Debt crisis

The abject failure of the Thomas Cook share price is a story of long-term mismanagement, in my opinion.

CEO Peter Fankhauser has moved more recently to reassure customers that they can continue booking holiday deals with confidence. But those who bankrolled his firm’s runaway expansion are not so sure.

The company was hampered by weak sales over the normally lucrative summer 2019 period with just 57% of its packages sold and average selling prices 9% lower. Fankhauser then blamed Brexit for customers delaying bookings.

But the real problems are structural and go back much further. Thomas Cook has massive, unsustainable debts. Half-year results to the end of March 2019 showed net debt at £1.2bn and an operational loss over the period of £1.4bn.

Buying out eight travel companies between 2008 and 2011 added to the firm’s debt pile and means that since 2012, the group has had to pay £1.2bn in interest and refinancing costs alone. “Every year we have to sell 3 million holidays before we have our interest burden paid,” Fankhauser has said.

Rescue me

Thomas Cook told the market on 28 August it had secured the main terms of a £900m rescue deal with Fosun.

Responding to the news, AJ Bell investment director Russ Mould said: “Shareholders in the troubled travel company may have to accept that their investment could be worthless.

Fosun and Thomas Cook’s lenders are going to get the lion’s share of the equity, meaning very little — if anything — is left on the table for the other shareholders.”

What next?

The outlook for the Thomas Cook share price is not good. It is now number one on the list of the most shorted stocks on the FTSE index according to shorttracker.co.uk, with 10.6% of shareholders betting the price will fall further.

Thomas Cook has burned through its cash — and investors’ goodwill — at a stunning pace.

As of 12 September, bosses are reportedly seeking another £100m from lenders to take a proposed rescue deal to £1bn. The company has warned it could face collapse if a deal is not secured by the end of the month.

Only the most blinkered optimist could suggest a turnaround is on the cards. In my opinion there is only one way this is going to end. 

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Tom has no position in the shares 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.

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