Thomas Cook Group (TCG) rights issue – go or no go?

On 16th May TCG announced a placing followed by a rights issue. Investors will need to decide shortly whether to take up their rights or not.

TCG had previously indicated that it was reviewing its capital structure (although this was quite deep in an announcement of 13th March) and it was, perhaps, not surprising, given the sharp rise in the share price (from being in the low 20ps towards the end of last year to a closing high of 164p on May 16th) that it should seek to raise some more equity funding. The Group has a relatively high level of borrowing with short maturities and the Placing and Rights issue will enable it to reduce borrowing and at the same time, by issuing new debt, extend the maturity thereof.

TGC Basic Facts and Timetable of the Capital Restructuring
16.05.13	Announcement
23.05.13	E525m of debt issued at 7.75%
04.06.13	Placing of 87.6m shares (an increase of 9.4%) at 137p
05.06.13	Shares marked ex rights, being 2 for 5 at 76p (401.6m shares)
05.06.13	New ordinary shares nil paid admitted to trading
13.06.13	Deadline for holding in certificated form
14.06.13	Deadline for transferring into Crest (non certificated form)
19.06.13 (11am)	Deadline for payment and paperwork (Crest only)
20.06.13	Dealings in new ordinary shares, fully paid, commence

With the shares trading at 114p (ex rights) at the time of writing, the shareholder has the option of either selling his rights nil paid trading at c. 38p per right or taking up the rights, by paying 76p per right and increasing his value by 38 p per right taken up. That is, the owner of 1000 shares (with rights entitlement) will have a current value of £11,400 in their existing shares, together with nil paid rights worth £1,520 (at a price of 114p per existing share). They will have the option of either selling those rights for £1,520 (or potentially selling part of them), or paying the 76 p per share (in this case a total of £3,040 to take up all the rights) to obtain 4000 new shares worth £4,560 (ie the current value of the rights, £1,520, plus the amount paid for the new shares, £3,040).

For information, at a share price of 114p, the rights value per existing ordinary share is 15.2p, ie 40% (2 per 5) of the difference between the share price (114p) and the cost of taking up the rights (76p). Obviously, each individual will have different circumstances, but the fundamental decision is do you want, at this point, to increase your exposure to TCG or not.

We look below at a comparison in terms of valuation between TCG and Tui Travel (TT.) which is a close competitor and is currently in our model equity portfolio. All figures for TCG are post the new ordinary shares being issued, with certain projections; TT. figures are the actual last 12 months announced.

Valuation Comparison	TCG	TT.
Price (p)	114	344
Market cap (£m)	1,624	3,846
Enterpirse value (EV) (£m)	2,446	4,895
Market cap/EV	66.4%	78.6%
EV/Revenue (a)	24.7%	34.0%
Adj. operating profit/EV (b)	12.3%	10.6%
EPS (p) (c)	8.8	26
P/e	13.0	13.1
Dividend yield	0%	3.5%

Conclusion

Compared to TT., TCG is cheaper on some measures (giving credit for projections), but not on P/e. It should be cheaper since with higher gearing it is a riskier investment; on the other hand, it should also have more scope for self improvement. For example, if TCG were to be able to achieve TT.’s operating margins and achieve the assumed revenue growth rate above, then the p/e at 114p would fall to c. 9.7 (with 20% pro –forma tax rate).

We are not entirely convinced that TCG is cheap enough compared to TT. to justify the risks.