On Thursday night, press reports suggested Thomas Cook Group (LSE: TCG) needed to find another £200m to secure its long-awaited bailout deal.
On Friday morning, the company issued a statement admitting this press speculation was mostly correct. Its stakeholders are asking for an extra £200m “seasonal standby facility” in addition to the £900m already needed for the group’s recapitalisation. My impression is that this request is coming from the group’s banks.
As I write, Thomas Cook shares are down 22%, at about 3.5p. Anyone left holding these shares will probably be wondering whether they should sell. Some thrill-seeking investors may even be considering buying. Here’s why I think the shares are a slam dunk sell.
From £300m to £1.1bn…
Back in May, Thomas Cook was already in trouble. The group had debts of £1.7bn and was reporting weak trading and heavy discounting.
Despite this, management said they’d received “multiple bids” for the firm’s airline business. The company had also secured a £300m bank facility to help it through the winter months, when travel firms have to pay for next summer’s hotel reservations.
Things have got steadily worse since then. Refinancing requirements have risen to £1.1bn and plans to sell the airline have been scrapped.
Instead, ownership of the airline will be transferred to the group’s lenders and Chinese firm Fosun, as part of its recapitalisation plan.
I’d get out while you still can!
In August, the company warned existing shareholders were likely to face significant dilution. At the time, I estimated if the recapitalisation plan went ahead, existing shareholders might be left owning about 2% of the company.
In today’s update, the company has extended this warning. Management now says shareholders face a “significant risk of no recovery.”
That’s all I need to know. Thomas Cook’s management are effectively warning investors there’s a good chance the shares will go to zero.
There are more problems
Finding someone willing to provide an extra £200m won’t be easy. But even if the company does manage to do this, the group’s refinancing could still be in trouble.
A group of hedge funds are currently blocking approval of the deal until they receive confirmation it will trigger payouts on ‘credit default swaps’, a form of insurance policy against the firm’s debts.
Even without this complication, I get the feeling Thomas Cook’s lenders are starting to wonder whether putting more money into this company is a good idea. Are they just throwing good money after bad?
I certainly wouldn’t consider putting any more money into this troubled business, which has nearly failed before. Sometimes it’s better to cut your losses and run.
That’s certainly what I’d do with Thomas Cook stock. In my opinion, the shares are very likely to end up at zero pence. I think the only sensible thing to do with this stock is to sell today… at any price.
Roland Head has no position in any of 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.