Thomas Cook’s shares plunged by 40% on Friday, their biggest drop since the firm nearly collapsed in 2011, after a high-profile City analyst said the company’s shares were worthless.
Wall Street bank Citigroup produced a research note advising investors to sell shares in the 178-year-old tour operator, which reported a £1.5bn loss earlier this week, citing a drop in holiday bookings due to Brexit uncertainty.
The bank set its target price – indicating the likely future value of the shares – at zero. As the City digested the note, shares in the company nosedived to 11.8p, cutting the company’s stock market value by £120m, to £180m.
Citigroup analyst James Ainley said he believed the company would soon have “zero equity value” because of an anticipated rise in its debts, which already stand at £1.2bn.
He said this was because the company would most likely have to be rescued via an issue of new shares, which could dramatically reduce the value of existing stock, or a debt-for-equity swap.
The latter measure, taken recently by distressed companies such as Interserve and Debenhams, involves lenders writing off debt in exchange for taking ownership of the company’s shares, which would wipe out shareholders’ investment.
Thomas Cook is already trying to shore up its balance sheet by seeking to sell its aircraft business and borrowing more money.
Thomas Cook owes its name to a humble and deeply religious 32-year-old cabinet-maker who, one June morning in 1841, hiked the 15 miles from his home in Market Harborough to Leicester, to attend a temperance meeting.
The former Baptist preacher believed that the ills of Victorian society stemmed largely from alcohol and, presumably fatigued from his walk, realised he could deploy the power of Britain’s flourishing rail network to help spread the word.
Addressing the temperance meeting, he suggested that a train be hired to carry the movement’s supporters to the next meeting in Loughborough.
Thus, on 5 July 1841, some 500 passengers travelled by a special train the 24-mile round trip, paying a shilling apiece.
Over the next few years, Cook laid on ever more trains, introducing thousands of Britons to train travel for the first time. The first such outing to be run for commercial purposes was a trip to Liverpool in 1845.
Over the next decade or so, the business expanded to offer overseas trips, to France, Switzerland, Italy and beyond, to the United States, Egypt and India.
His more business-minded son John expanded the tour operator and its reach was such that the government enlisted its expertise in an effort, ultimately in vain, to relieve General Gordon at the siege of Khartoum in 1885.
John’s three sons inherited the business, which incorporated as Thos Cook & Son Ltd in 1924 and benefited from the increasing ease of international travel.
Its first flirtation with collapse came during the second world war, when the government requisitioned some of its assets and it was sold to Britain’s railway companies, effectively a nationalisation.
But it boomed in the post-war years as growing prosperity fuelled the appetite for holidays and it returned to private ownership in 1972.
Since then, it has changed hands and changed shape via a series of mergers and takeovers. It nearly collapsed in 2011 but averted its demise with a bailout deal funded by banks.
Now, after 178 years of operation, it finds itself in peril once again.
The firm’s lenders have so far agreed to inject £300m of new funds to see the company through next winter but this is contingent on the firm making progress with the sale of its airline business.
Lufthansa has said it put in an offer for Thomas Cook’s German airline Condor, while Virgin Atlantic is reportedly interested in the long-haul business.
Thomas Cook is being circled by potential bidders for other parts of the business and could be split up. The Chinese company Fosun, the largest Thomas Cook shareholder, is among those eyeing up its high street branches and package holiday business.
The scale of the crisis affecting Thomas Cook was laid bare earlier this week as it posted a £1.5bn first-half loss after experiencing a £1.1bn writedown on the value of its business. It also issued its third profit warning in less than a year and admitted that British customers had postponed summer travel plans because of Brexit uncertainty.
Britain’s oldest package holiday firm said it had sold just 57% of its summer 2019 holidays, with tour operator bookings down 12%. It has slashed the number of holidays it offers in response to weaker demand, and is offering big discounts to entice UK customers.
Peter Fankhauser, Thomas Cook’s chief executive, said: “There is now little doubt that the Brexit process has led many UK customers to delay their holiday plans for this summer.”
Citigroup said Thomas Cook’s dire financial results and concerns expressed publicly by its auditors would “unsettle consumers and drive further weakness in bookings”, which are already down 12% this summer compared with last year.
“Although the group has longstanding hotel partners that have been supportive, we fear that further weakness in the bonds/shares may also cause them to seek to tighten payment terms.”
Citigroup’s note was the most pessimistic of a range of analysts’ forecasts, with Jefferies setting a target price of 24p and Oddo BHF predicting 18p.
The crisis at Thomas Cook marks the re-emergence of the debt problems that dogged the company in 2011, nearly resulting in its collapse. Its shares fell by as much as 50% in a day, when it emerged that the firm was locked in emergency talks with its lenders. The tour operator was only saved after its banks agreed to provide funds to keep it trading.
In the event of a tour operator’s collapse, holidaymakers are protected by Atol, which reimburses them for the cost of hotels and flights. The scheme is funded by a levy on travel companies.
