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Thomas Cook Collapse Leaves Fund Managers Empty Handed

After multiple profit warnings and a failed rescue deal, Thomas Cook collapse has left investors with worthless shares

James Gard 23 September, 2019 | 10:40AM

Thomas Cook

The collapse of Thomas Cook has been expected for some time but will still be a shock to investors, bond holders, holidaymakers and fund managers who kept faith with the 178-year-old company despite multiple profit warnings.

The shares closed at 3.45p on Friday, a fall of 23%, as it emerged that the group had sought government help with an emergency rescue package.

With no rescue deal forthcoming, Thomas Cook went into liquidation in the early hours of Monday morning as banks pulled the plug after last-ditch efforts to secure extra funding failed.

Helal Miah, investment research analyst at The Share Centre, said Thomas Cook had faced a perfect storm of terrorism, Brexit, high debt and had failed to adjust to the online world. The collapse “highlights how investors need to be very wary of highly leveraged businesses and the dangers of trying to catch a falling knife,” Miah says.

“Ultimately Thomas Cook failed because it didn’t have the cash flow to reinvent itself to fight off growing competition as so much money was going on debt repayment,” says AJ Bell’s investment director Russ Mould.

IG's senior market analyst noted the boost in airline and travel stocks today: "Much like the Monarch airlines collapse back in 2017, this provides the likes of easyJet, Ryanair and IAG with a short-term boost to load factor and demand for unused planes. However, today's big gainer came in the form of TUI, with the package tour operator able to consolidate customers in an industry that has been feeling the strain in the face of a shift in travel habits."

Earlier in the summer the group looked set to survive as a going concern with a £750 million injection from Chinese tourism firm Fosun - Thomas Cook’s largest shareholder with an 18% stake. The proposal was to separate the airline and tour operator business and issue more shares, significantly diluting existing equity holders. The company’s shares nearly halved on the announcement, and some analysts – including those at Citi – speculated that this was the beginning of the end for the company.

Fund Managers in a Tricky Position

The decline of Thomas Cook in recent years has hit a number of large fund houses, including Invesco, Jupiter and Standard Life Aberdeen, which have held stakes.

Invesco sold out of Thomas Cook at the end of July 2019, and another shareholder, Jupiter Asset Management, is now below the “notifiable” level of 5%, according to a stock exchange announcement on September 20.

Seven Investment Management’s Peter Sleep says it is not easy for fund managers to offload big positions in struggling companies even if they wanted to, due to the lack of willing available buyers at the required volume of shares.

Thomas Cook was one of the biggest share price fallers on the FTSE in 2018, falling from 124p to 32p, a fall of 80%. Unsurprisingly, the group is one of the most-shorted stocks on the FTSE, with almost 10% shorted. While Thomas Cook may have seemed a one-way bet for short-sellers this year, Michael Browne, a portfolio manager on the Martin Currie European Long/Short strategy, says there is often a shortage of stock available to borrow when a company gets to such distressed levels as Thomas Cook.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

James Gard  is content editor for Morningstar.co.uk

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