Law Suit Launched Against Grant Thornton over Patisserie Valerie Audits

The Daily Telegraph and some other sources have reported that the liquidators of Patisserie Valerie (CAKE) have filed a claim in the High Court against Grant Thornton over the audits of Patisserie Valerie in the years before it went into administration.

I reported previously that the accounts of Patisserie were a complete fiction see Reference 1 below – with the assets of the firm overstated by more than £90 million.

The liquidators are FRP Advisory and they have appointed lawyers Mischon de Reya to pursue the case. Will this mean that if the action is successful that ordinary shareholders will see any return? Highly unlikely I would guess as secured creditors will take priority, and those include the former Executive Chairman of the company, Luke Johnson, who lent the company many millions in an attempt to keep if afloat before it failed. In addition there will be very substantial legal costs which cannot always be recovered in full even if the action is won. In addition, administrations and liquidations always consume a very large amount of cash.

Grant Thornton only recently lost another legal action over their audit work at AssetCo where they not only blamed everyone else for the defective accounts but actually claimed that AssetCo was better off not knowing the truth of its own financial position! See Reference 2 below.

The Financial Reporting Council (FRC) have proposed to tighten up the responsibility of auditors to identify fraud (see Reference 4) which has been far too lax in the past. But the Patisserie action will depend on the historic rules. However the Courts have clearly made it plain that irresponsible audits will not be totally excused. Without wishing to prejudge the case, Grant Thornton looks like they will have a lot of explaining to do because the fraud looks a simple case of assets such as cash being grossly overstated. Grant Thornton have however said they will “rigourously defend the claim”.

Reference 1: Patisserie Administration: https://roliscon.blog/2019/03/16/patisserie-and-interserve-administrations-plus-brexit-latest/

Reference 2: AssetCo case: https://roliscon.blog/2019/02/06/assetco-case-and-grant-thornton-defense/

Reference 3: Daily Telegraph article: https://www.telegraph.co.uk/business/2020/11/20/grant-thornton-hit-legal-challenge-collapse-patisserie-valerie/

Reference 4: FRC Tightens Audit Rules: https://roliscon.blog/2020/10/29/preventing-fraud-in-accounts-fca-tightens-audit-rules/

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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The New Corporate Insolvency and Governance Bill

The Government has introduced the Corporate Insolvency and Governance Bill into Parliament. This is quite an important piece of legislation for share investors and for property investors. Insolvency practitioners will also be interested as it makes substantial changes to that area. It’s had very little media coverage though as the news channels are swamped by coronavirus news, debate over Dominic Cummings breaking the lock-down (or not depending on your point of view) and Brexit news.

The Bill is being “fast tracked” through Parliament as it is considered urgent. Some of the measures in the Bill cover practical problems arising from the epidemic crisis. Some are temporary but others are permanent.

As regards insolvency, the Bill introduces greater flexibility into the insolvency regime. For example, it provides greater powers to ward off creditors and enable directors to escape personal responsibility if they continue trading. It provides a “moratorium” to facilitate a rescue of a business via a company voluntary arrangement (CVA), or a restructuring or fund raising as opposed to it going into administration. The directors can remain in charge of the business while a restructuring plan is put in place, or a scheme of arrangement decided upon. A “monitor” (a licensed insolvency practitioner) has to oversee the process however and give consent to various matters.

It will provide more flexibility for companies in difficulties, while complicating insolvency law, which is complicated enough already. It also includes provisions for companies to ward off winding up petitions during the epidemic crisis which have apparently been used lately by landlords to get rent paid after a “statutory demand” has been issued. In addition while in a moratorium, the company is protected from termination of supply agreements.

In summary this new “moratorium” facility should be a big advantage to companies that are in financial difficulties, and may better protect the interest of shareholders than the existing provisions in insolvency law. Companies in difficulties are too often forced into administration where ordinary shareholders typically receive nothing when a temporary “stay of execution” might enable them to survive and subsequently prosper.

General Meetings

Another aspect of the new Bill are provisions to allow companies to hold General Meetings electronically. Investors will already have seen companies only permitting two shareholders to attend their Annual General Meetings because of the restrictions imposed on public meetings by the Government. The Articles of most companies do not provide for electronic meetings at present.

The new Bill enables any company to use an electronic general meeting, or a hybrid meeting (i.e. some people physically present and some accessing it electronically). Companies can also delay their AGMs. These provisions are only temporary. Companies can also delay their account filings.

The Bill gives companies the right to run meetings as they see fit. For example it says: “The meeting need not be held at any particular place; The meeting may be held, and any votes may be permitted to be cast, by electronic means or any other means; The meeting may be held without any number of those participating in the meeting being together at the same place; A member of the qualifying body does not have a right— (a) to attend the meeting in person, (b) to participate in the meeting other than by voting, or (c) to vote by particular means.”.

This may be acceptable in the short term, during the epidemic crisis, but I have suggested to the ShareSoc directors that the organisation should draw up some recommendations for how “virtual” or “hybrid” meetings should be held in future. The experience to date of such meetings is very unsatisfactory, with answers to questions not being given at the meeting for example. Not having the interactivity of a physical meeting with at least some members present is also a severe disadvantage.

Some bigger companies have already updated their Articles to permit such meetings but a recommended set of Articles should also be published that do not simply give the directors the power to run such meetings as they see fit.

For more details of the Bill’s provisions, see https://services.parliament.uk/bills/2019-21/corporateinsolvencyandgovernance.html.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Dividends Slashed, Investing for Income, NMC Health and Finablr

Many companies are announcing cancelled, reduced or postponed dividends – two of the latest were Shell (RDSB) and Sainsburys (SBRY). This will hit investors hard who rely on dividends for retirement income. But should they be doing so?

Terry Smith of Fundsmith had an article published in the Financial Times today under the headline “Investors: never let a crisis go to waste” in which he attacks income funds. In particular he questions whether the Investment Association should allow funds with “income” in their name to only have a yield greater than 90% of the average fund yield, i.e. less than the average! Even that requirement has now been suspended for 12 months. Terry calls this a “ridiculous piece of deception” and I can only agree.

If you invest in individual shares, there is a strong temptation in times of stock market crises to run for the hills and start buying what are viewed as defensive businesses with high dividend payouts. You argue that the dividend yield will keep the share price up even if all other news is bad. But this is a fallacy. All you do is put yourself at risk of a sharp decline in the share price when the dividend is chopped.

As Terry Smith also pointed out in his article, dividend cover in many companies that are on high yields are inadequate. In reality they are not maintaining the businesses, or certainly not growing it, by not investing enough of their profits back into the business. Sometimes it indicates that they are operating in a declining sector and many have an abysmal return on capital. Should you really be investing in such companies is the question you should ask yourself?

The simple rule should be: Never invest in a company solely for the dividend. Invest in it because it is a quality company with positive prospects and management dedicated its long-term future for the benefit of all stakeholders.

I have mentioned NMC Health (NMC) and Finablr (FIN) in previous blog posts along with many other frauds. It’s not that I am trying to put off people from investing in the stock market which is one of the main sources of what little wealth I have. Likewise when I criticise those who invest in income funds or high yielding shares. But my desire is to educate people about how to get positive rather than negative results. NMC and Finablr have both been chaired by Dr B.R.Shetty and he made a rather surprising comment in a letter which was published by Finablr yesterday. He said: “The preliminary findings provided by my advisors from my own investigations indicate that serious fraud and wrongdoing appears to have taken place at NMC, Finablr PLC (‘Finablr’), as well as within some of my private companies, and against me personally. This fraud also appears to have been undertaken by a small group of current and former executives at these companies”. He goes on at some length on how the frauds were committed. This all sounds rather unlikely but we will no doubt see in due course whether what he says is true.

The shares of both companies are currently suspended and NMC is already in administration. Finablr also had this to say: “The results of this exercise currently indicate that the total net indebtedness of the Finablr Group may be approximately $1,300 million (excluding any liabilities of the Travelex business). This is materially above the last reported figure for the Group’s indebtedness position as at 30 June 2019 and the levels of indebtedness previously disclosed to the Board. The Board cannot exclude the possibility that some of the proceeds of these borrowings may have been used for purposes outside of the Finablr Group”.

The outlook for shareholders in both companies looks very bleak indeed. Let us hope that the investigation of these frauds is quicker than it normally is, but I doubt it will be. The larger and more complex the company, and the bigger the fraud, the longer it takes regulatory authorities to pin the tail on the donkey. Think of Polly Peck for example.

As I said in my previous blog post that mentioned false accounting at Lookers, “Such events totally undermine investor confidence in the accounts of public companies and suggest much tougher action is required to ensure accounts reported by companies are accurate and not subject to fraud or misrepresentation”.

For investors the motto must be ““Let’s Be Careful Out There” (as said by the sergeant in Hill Street Blues) because the financial world is full of shysters. You need to research companies as much as possible before investing in them, but even that is not fraud-proof unfortunately. Only improved regulation and accounting can really solve the problem of corruption in the financial scene.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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De La Rue, Excessive Debt, Victoria and Link’s Debt Monitor

Link Asset Services have issued a note pointing out that De La Rue (DLAR) has net debt that now exceeds its market cap. The high debt in the company and recent falling revenue no doubt accounts for much of the recent fall in the share price, although the report of an investigation by the Serious Fraud Office (SFO) cannot have helped. But if you read the last interim report which was issued a couple of days ago, there are lots of other points that might put you off investing in the company. For example, it declares the business is in “turnaround” mode so restructuring is being accelerated, and that all of the Chairman, CEO, senior independent director and most of the executive team have left or resigned in the period.

How do you judge whether a company has excessive debt? There are two simple ratios which I look at for companies. The Current Ratio (current assets divided by current liabilities) and the interest cover (operating profits divided by net interest paid). For operating businesses I prefer to see a current ratio higher than 1.4 and interest cover of several times.

Why because companies go bust, or have to come to some accommodation with their bankers or raise urgent equity finance – all of which can be very damaging for equity shareholders, when they run out of cash. A low current ratio or low interest cover means that any sudden or unexpected decline in revenue and profitability can mean they get into financial difficulties. They simply have no buffer against unexpected adversity.

De La Rue’s Current Ratio is only 0.63 according to Stockopedia and as there were negative profits (i.e. losses) in the half year the Interest Cover is zero.

There are some exceptions to the Current Ratio rule so sometimes it is necessary to look more closely at the reasons for a low figure, but De La Rue just looks like a business in some difficulty.

Link Asset Services’ note also points readers to their Debt Monitor (see https://www.linkassetservices.com/our-thinking/uk-plc-debt-monitor ) which gives a comprehensive overview of the indebtedness of UK listed companies. They point out that it has risen by 5.8% to a new record of £433 billion. For comparison that’s only just higher than the Labour Party proposes to borrow for its “Infrastructure Fund”! But it’s worth pointing out that the FTSE is dominated by relatively few very large and traditional companies. They have probably been using financial engineering to enable them to maintain dividends and the result is higher debts. Or they are dedicated to the mantra of having an “efficient” balance sheet where there is significant debt so as to maximise shareholder returns, and have been buying back shares using debt.

Debt has become easier to obtain after the financial crisis of 2008/09 when banks were reluctant to lend at all. Interest rates have also come down making debt very cheap for those with good credit ratings and good security. It’s worth reading the Link Asset report to see which major companies and sectors have the most debt.

In smaller companies, particularly technology companies, there tends to be much less debt partly because they have few fixed assets against which to secure cheap debt. So they find equity less costly and more readily available. Or perhaps they just have more sense in realising that business is essentially uncertain so equity is preferable to debt.

There is relatively little debt in the companies in which I am invested (De La Rue is definitely not one of them) with one exception which is Victoria (VCP). If you wish to be convinced of the wonders of debt financing read the comments of Victoria’s CEO Geoff Wilding in their last Annual Report. In such companies one has to have faith in the management that they can control the risks that come with high debt levels. But most investors get very nervous in such circumstances which is probably why it’s only on a p/e of 10 (and my personal holding is relatively small). That’s so even though it has a Current Ratio of 1.8 and Interest Cover of 1.2 – the latter is too low for comfort in my view.

Of course it depends whether this is a temporary position (say after an acquisition) and how soon the debt is likely to be repaid. So you need to look at the cash flows. In the case of De La Rue it was minus £42 million in the half-year before investing/financing activities which is yet another negative sign, but it was a positive £38 million at Victoria in their half-year results announced on the same day. Clearly two very different businesses!

Note that there are some other financial ratios that you can look at to see the risk profile of a company but as always, a few simple things that you actually pay attention to plus getting an understanding of the business trends are to my mind more important.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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GB Group, Patisserie Holdings, FRC Stewardship Code and Halma

The stock market seems to be in limbo as business waits to see the outcome of Brexit politics. In my portfolio, small cap companies are drifting down and even large funds and trusts have been declining. Is this due to currency effects or the realisation that “star” fund managers such as Neil Woodford cannot be relied upon? Others are just bouncing around. However there was one exception yesterday when GB Group (GBG) jumped 14% after a positive trading statement. That company is one of my more successful longer-term holdings but there may be more growth to come from it because of the sector in which it operates. On-line id verification is becoming essential for many businesses.

The Administrator for Patisserie Holdings has issued their final report before the business moves into liquidation and another firm took over from KPMG to look into any legal recovery from the past auditors (Grant Thornton) and others. The handover was due to a conflict of interest. The Serious Fraud Office is still investigating the affairs of the company and a number of arrests have been made, but ordinary shareholders should not expect any return and it could be years before the legal processes are completed from past experience of similar situations. Even preferential creditors may not receive anything. The administration has so far cost £2.3 million.

The Financial Reporting Council (FRC) have announced a new Stewardship Code to improve the activities of institutional investors – see https://tinyurl.com/y5no8ot4 . There is more emphasis on “Purpose, values and culture” and the recognition of environmental, social and governance (ESG) factors.

This is all very worthy, but personally I would prefer the FRC concentrated on tightening up the quality of public company accounts for which it is responsible. It also needs to be a lot more forceful on patent audit failures that enable frauds to go undetected for years as at Patisserie – and there have been many other similar cases of not just downright fraud but also over-optimistic presentation of accounts.

This morning (25/10/2019) I attended a presentation by Halma Plc (HLMA) in the Investec offices. It was given by Charles King, Head of Investor Relations and it was a highly professional presentation unlike many we see. I have held shares in the company for four years and it confirmed that my choice of it as an investment was sound. But I did learn a bit more.

I’ll cover some of the key points that were made. This company has strong fundamental growth drivers. It has grown both organically and my acquisition over 45 years and now has 45 companies in the portfolio which primarily operate independently. One might call it a conglomerate. It focuses on life saving technology businesses – in essence “safer, cleaner, healthier”, in global niche markets. These are often regulated markets which helps on defensibility and growth. Demographic trends help as more people who are older and fatter promote growth and higher regulatory standards also move in. There is a lot of diversity in the products.

They aim for 15% growth per annum and have 6,000 staff in total. They bet strongly on “talent” to run the businesses. In essence there are many little companies all run by entrepreneurs who are left to operate as they wish. These people are paid on the basis of profit achieved in excess of the cost of capital but one requirement they look at when recruiting is that they must have “low egos”. There is only a small group of central staff handling some corporate functions.

Their focus is on acquiring companies with low capital intensity and ROTIC of greater than 16% when their cost of capital is about 8%. They are very diversified internationally but see opportunities to grow more in Asia/Pacific and other developing markets.

The high share price was questioned (or as one person put it: “it’s in nose bleed territory”). It’s currently on a forecast p/e of 32 according to Stockopedia which is higher than when I purchased shares in 2015 but the share price has more than doubled in that period. This company is like many high revenue/profit growth companies – they never look cheap but simply grow into their share price.

However the share price has fallen back of late like a lot of highly valued technology stocks that I hold. The speaker attributed this to market trends, not management share selling. Growth companies tend to go out of fashion as economic headwinds appear.

But if they stick to the business model, with the high return on capital and sensible acquisitions, I doubt they can go far wrong. In summary a useful and enlightening meeting for a company that until recently kept a low profile. But it is now in the FTSE-100 (market cap £7 billion).

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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SVS Securities Update – Another Example of the Dangers of Nominee Accounts

ShareSoc have published an update on the situation at broker SVS Securities which went into administration recently and has affected 21,000 clients – even more than the number at Beaufort. As has happened before, it looks like some clients will lose money as a result of the “Special Administration” regime and there will be the usual long delays before clients are able to regain control of their shares and receive dividends on them. Read the update here: https://tinyurl.com/y6q82ekp

Yet again this displays the danger of the nominee account system which I have repeatedly campaigned against – see the ShareSoc web site here for more information: https://www.sharesoc.org/campaigns/shareholder-rights-campaign/

Please do support ShareSoc’s campaign on this issue, and support them by becoming a member. Nominee accounts are positively dangerous and do not protect your investments regardless of what the broker tells you.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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LoopUp Profit Warning and Brexit Party Policy

Conference calling AIM company LoopUp (LOOP) issued a trading statement this morning which contained a profit warning. At the time of writing the share price is down 47% on the day but it has been falling sharply in recent days which suggests the bad news had already leaked out.

This is an example of what happens when lofty growth expectations are revised downwards. Revenue is now expected to be down 7% on the previous market consensus and EBITDA down 20%. The company blames the shortfall on “subdued revenue across its long-term customer base” driven by macro-economic factors and diversion of sales staff into training new ones.

LoopUp is presenting at the ShareSoc seminar event on the 10th July so it will be interesting to hear what they have to say about this – see https://www.sharesoc.org/events/sharesoc-growth-company-seminar-in-london-10-july-2019/ . This news comes only a month after LoopUp held a Capital Markets Day when there was no hint of these problems. I did a report on that here: https://roliscon.blog/2019/06/07/broker-charges-proven-vct-performance-fee-and-loopup-seminar/

I do hold a few shares in LoopUp but thankfully not many.

Brexit Party Policy

I mentioned in a recent blog post that the Brexit Party is looking for policy suggestions to enable them to develop a platform for any prospective General Election. Here’s what I sent them with respect to financial matters:

  1. The personal taxation system is way too complicated and needs drastically simplifying. At the lower end the tax credit system is wide open to fraud while those on low incomes are taxed when they should not be. The personal tax allowance, both the basic rates, and higher rates, need to be raised to take more people out of tax altogether.
  2. The taxation of capital gains is also now too complicated, while tax is paid on capital gains that simply arise from inflation, which are not real gains at all. They should revert to being indexed as they were some years ago. For almost anyone, calculating your own tax that is payable is now way too difficult and hence requiring the paid services of accountants using specialist software.
  3. Inheritance tax is another over-complex system that wealthy people avoid by taking expert advice while the middle class end up paying it. It certainly needs grossly simplifying, or scrapping altogether as a relatively small amount of tax is actually collected from it.
  4. The taxation of businesses is inequitable with the growth of the internet. Small businesses, particularly retailers, pay a disproportionate level of tax in business rates while their internet competitors often avoid VAT via imports. VAT is now wide open to fraud and other types of abuse such as under-declarations, partly because of the EU VAT arrangements. VAT is in principle a simple tax and the alternative of a sales tax would create anomalies but VAT does need to be reformed and simplified.
  5. All the above tax simplifications would enable HMRC to be reduced in size and the time wasted in form filling by individuals and businesses reduced. Everyone would be a winner, and wasted resources and expenditure reduced.
  6. The taxation of company dividends on shares is now an example of the same profits being taxed twice – once in Corporation Tax on the company, and then again when those profits are distributed to shareholders. This has been enormously damaging to those who receive dividends and the lack of tax credits has also undermined defined benefit pension funds. The taxation of dividends should revert to how it once was.
  7. The regulation of companies and financial institutions needs very substantial reform with much tougher laws against fraud on investors. Not only are the current laws weak but the enforcement of them by the FCA/FRC is too slow and ineffective. Although some reforms have recently been proposed, they do not go far enough. Individual directors and senior managers in companies are not held to account for gross errors or downright fraud, or when they are, they get off too lightly. We need a much more effective system like they have in the USA, and better laws.
  8. Shareholder rights as regards voting and the receipt of information have been undermined by the use of nominee accounts. This has made it difficult for individual shareholders to vote and that is one reason why investors have not been able to control the excesses in director pay recently. The system of shareholding and voting needs reform, with changes to the Companies Act to bring it into the modern electronic world.
  9. The pay of directors and senior managers in companies and other organisations has got wildly out of hand in recent years, thus generating a lot of criticism by the lower paid. This has created social divisions and led partly to the rise of extreme left socialist tendencies. This problem needs tackling.
  10. Governance of companies needs to be reformed to ensure that directors do not set their own pay, as happens at present, but that shareholders and other stakeholders do so. Likewise shareholders and other stakeholders should appoint the directors.
  11. Insolvency law needs reform to outlaw “pre-pack” administrations which have been very damaging to many small businesses. They are an abuse of insolvency law.
  12. All the EU Directives on financial regulation should be scrapped (i.e. there should be no “harmonization” with EU regulations after Brexit). The MIFID regulations have added enormous costs to financial institutions, which have passed on their costs to their customers, with no very obvious benefit to anyone. Likewise the Shareholder Rights Directive might have had good objectives but the implementation has been poor because of the lack of knowledge on how financial markets operate in the UK. Other examples are the UCITS regulations which have not stopped Neil Woodford from effectively bypassing them, or the PRIIPS regulations which have resulted in misleading information being provided to investors.

Let me know if you have other suggestions, and of course the above policies might be good for adoption by other political parties in addition.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Grant Thornton, Interserve and Arc Fund Management

The Financial Reporting Council (FRC) have announced an investigation into the audits by Grant Thornton of the accounts of Interserve (IRV) in the years 2015-2017. Interserve was a large outsourcing company with most of its business from Government contracts. It ran out of cash and went into administration on the 15th March with debts of £738 million. Readers will no doubt be aware that Grant Thornton were also the auditors of Patisserie Holdings and Globo, both cases where very substantial fraud took place.

I received a rather odd letter recently from a company called Investment Recovery Services Ltd. It suggested that I might have been mis-sold an investment in the Arc EIS 5 Growth Fund promoted by Arc Fund Management Ltd in 2006. The letter was odd for two reasons:

  1. I have never invested in that EIS fund or indeed with Arc Fund Management.
  2. Civil claims are time barred after 10 years so it seems unlikely that claims from 2006 could be pursued.

I know nothing about Investment Recovery Services Ltd although they seem to have been in existence for some years.

As regards Arc Fund Management Ltd the company itself was dissolved in 2017 but Arc Fund Management (Holdings) Plc changed its name to Consolidated Asset Management (Holdings) in 2008 and it subsequently delisted from AIM in late 2009. It again changed its name to SUSD Asset Management (Holdings) in 2011 and seems to be now a property development business with assets of £4.6 million.

I suggest anyone else who received such a letter and thinks they might have a potential claim should be very wary of such an approach. They key is never to pay money up-front on the basis that a claim will be pursued and it seems highly unlikely to me that such a claim could be pursued at this late date.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Debenhams PrePack, Dunelm Trading, ASOS and Privacy

Department store operator Debenhams (DEB) has been put through a pre-pack administration. It’s been bought by a new company formed by its secured lenders. Mike Ashley of Sports Direct is furious. His company invested £150 million in the shares of the company in the hope of taking it over, which will now be worthless. He had some choice words to say on the subject which included that it was an “underhand plan to steal from shareholders”, “as normal politicians and regulators fiddled while Rome burnt”, and that they “have proven to be as effective as a chocolate teapot”. I have much sympathy with Mike Ashley and the other shareholders as I have consistently criticised the use of pre-pack administrations in the past. It is an abuse of legal process. Why could it not have been put through an ordinary administration as the company appears to be a going concern, albeit with excessive debt, or Ashley’s offers considered?

Mike Ashley had previously made various offers to refinance the business including a pledge to underwrite a rights issue, but to no avail. It is not clear why his proposals were rejected, but as usual with pre-packs it is probably just a case of the lenders seeing the opportunity to make more money from a pre-pack. Ashley suggests he might try to challenge the pre-pack although that will be difficult now the deal is done.

What went wrong at Debenhams? Basically an old-fashioned retail format where sales were relatively stafic compounded by very high and onerous property leases and massive debt.

Contrast that with the trading statement from Dunelm (DNLM) this morning. This company sells home furnishings from out of town warehouse sites (not on the High Street like Debenhams) and have moved successfully into “multi-channel” operations with a growing on-line sales proportion. Overall like-for-like revenue in the third quarter is up by 9.8% with on-line sales up 32.1%.

Retailer ASOS (ASC) also announced their interim results this morning. Sales were up 14% but profits collapsed with margins declining and costs increasing while they invested heavily in technology and infrastructure. Competition in on-line fashion is increasing but you can see that such companies are taking a lot of business from High Street retailers, particularly in the younger customer age segment. The world has been changing and Debenhams has been an ex-growth business for many years. I do most of my clothes shopping, but not all, on the internet which shows even oldies are changing their shopping habits. I have never held Debenham shares although I do hold some Dunelm and have held ASOS in the past. But declining businesses with high debt are always ones to avoid however cheap the shares may appear.

Readers of my blog should be aware that after many years and growing amounts of spam I am changing all my email addresses. You can either contact me in future via the Contact page of my web site (see https://www.roliscon.com/contact.html ) or via the Contact tab on this blog.

It’s taking me some time to notify all the hundreds of organisations I am signed up with of my new email address. But that was almost frustrated when one of them sent out an email to all their clients using cc. rather than bcc. They have reported themselves to the Information Commissioner! But will they take any action? I doubt it. Thankfully the company in question used one of my older addresses which will soon be deleted. Such idiocy is not acceptable.

Another problem I am having of late is that if I mention a company or look at its web site, I then subsequently get bombarded with web advertising. So I am now seeing repeated advertisements for SuperDry products when I have absolutely no interest in such products. Despite removing cookies they still appeared. This is the kind of problem that is annoying people about the lack of privacy in the modern world and which needs tackling.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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LCF – Another Audit Failure & the latest on Brexit

I have not covered the events at London Capital & Finance (LCF) before although the national press has done so extensively. LCF sold “mini-bonds” to 11,500 people who invested £236 million in them and are likely to recover very little. These “bonds” were promoted as being “ISAs” in some cases when they were not, and that they were FCA regulated when in fact they were not – only the company was FCA “authorised” for certain activities but that did not include selling these bonds.

The company paid very generous commissions on the sale of the bonds, as much as 25%, and the money raised was invested in small companies with few assets and who are very unlikely to provide a return.

But it has now been disclosed in the Financial Times that based on the 2017 accounts of LCF it appears that the company was technically insolvent even then. However it received a clean audit report from auditors EY. Administrators Smith & Williamson report on a series of “highly suspicious transactions” linked to a number of individuals where money appears to have been diverted to them.

I have written repeatedly on the failures of the audit profession, and the lackadaisical approach of the Financial Conduct Authority (FCA) to improve standards and enforce them. Reforms are in progress (see https://roliscon.blog/tag/arga/ ) but it cannot be too soon. In the meantime, as always, the underlying problem is the gullibility of the public and their lack of financial education. Anyone who had undertaken more than a cursory look at the background of LCF and its finances would have shied away rapidly. But certainly being able to claim FCA authorisation was misleading and that is an issue that needs resolving.

Brexit

It seems Prime Minister May could have another attempt at passing her preferred EU Withdrawal Agreement which got defeated for the third time yesterday. Not that MPs managed to get any majority for alternative solutions in previous indicative votes. I supported the Prime Minister’s solution as a reasonable compromise although it was some way from being a perfect Agreement. However, with no time remaining to renegotiate it, refusal of the EU to countenance changes, and the general desire of the public to see the matter closed with no more debate, it was the best option available. However it was clear from watching yesterday’s debate that there are many MPs, both remainers and brexit supporters who had fixed opinions on the subject and were not going to change them. Mrs May’s problems were compounded by the Northern Irish DUP contingent, the awkward squad one might call them, and by Jeremy Corbyn doing all the could to obtain a general election by opposing any compromise in the hope of winning power.

What would I do if I were Prime Minister now? Decisive action is required which could include I suggest the following options: a) Ensure we exit the EU with no deal a.s.a.p. so as to force both the remainers and brexiteers to face up to reality, and the EU likewise – a rapid agreement on a free trade deal might then be concluded or the wisdom of Mrs May’s compromise would be made plain; or b) call a General Election with a new Conservative party leader and with a manifesto that is pro-Brexit. That would force all Conservative MPs to support the manifesto or be de-selected, i.e. they either support the manifesto or quit. The Labour party and other parties would also need to clarify their position on Brexit in their manifestos thus thwarting any more bickering about where they stand. With a bit of luck the outcome would be a clear majority in Parliament for a Government not beholden to minorities.

The EU might permit an extension of Article 50 to allow time for a General Election – at least 2 months is probably required, although there is no certainty on that. Some EU bureaucrats still seem to think that if they are awkward enough the UK will decide Brexit is not worth pursuing after all, but that ignores the political split that will remain in the UK with the Conservative party still disunited.

Will Mrs May take any decisive steps such as the above? I doubt it.

There is one advantage arising from the Brexit debate. The pressure on Parliamentary time has meant that the massive increase in Probate Fees for larger estates has been delayed. They won’t now take effect from the 1st April as proposed. Now might be a good time to die if you are fed up with this world so as to avoid more Brexit debates and save on probate fees!

Rather than finish on that depressing note, let us welcome a sunny Spring day that will lift all spirits, and with the pound falling (which helps many UK companies) and the stock market rising, life is not so bleak as politicians would have us believe.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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