Conviviality Fire Sale

Conviviality (CVR) has now gone into administration, and the ordinary shares are probably worthless (they were suspended some days ago and are likely to remain so). The administrators have already sold the major parts of the business in “pre-pack” administration deals. That’s where arrangements are made to dispose of assets in advance of the appointment of administrators by the prospective administrators before they have in fact been appointed. Is that legal you may ask? Yes it is because of a past legal case however perverse the result might be.

It’s interesting to look at the deals done by the Conviviality administrators:

  1. Retail chains Bargain Booze and Wine Rack have been sold to Bestway for £7 million.
  2. The wholesale division comprising the former businesses of Mathew Clark and Bibendum has been sold to C&C (owners of Magners Cider) for £1, although it seems the new owners have taken on some of the debts owed.

Matthew Clark was bought by C&C for £200 million three years ago and Bibendum was bought for £60 million in 2016. You can see why I call this a “fire sale” when the administrator seems to have lined up buyers in just a few days and disposed of these businesses at a value that seems to be a great bargain for the buyers.

One of the problems with administrations is that often the administrators have an objective to sell the business absolutely as soon as possible. This is to protect their own financial interests it frequently appears to me as much as it is to protect the jobs of employees and maintain a business as a “going concern”. Administrators can only get paid out of the cash that is present in the business or can be collected. That’s why nobody wanted to take on the administration of Carillion and it went straight into liquidation.

Administrators have an obligation to market a business for sale but can that be done adequately and the best price obtained when the deal has clearly been done in just a few days? That obviously does not allow any time for the normal due diligence on a substantial deal so the buyers won’t have paid anywhere near the normal market price for the assets.

In summary, the buyers of the assets get a great deal, the jobs get preserved (at least to some extent), the bankers to the company often get their loans back and the administrators get well paid while minimising their risks. But the previous owners of the business (the ordinary shareholders) get left with nothing. Is that equitable?

In effect the current legal structure, and particularly the pre-pack arrangements, enable the rapid dismantling of a business when it might have been recoverable if the company had been able to have more time to refinance the business and stave off its creditors for just a few weeks.

This is why I argue that the current UK insolvency regime needs reform. It destroys companies in short order when ordinary shareholders have often invested in the company to grow the business in the past. In the case of Conviviality it only listed on AIM in 2013 and did subsequent placings to finance its expansion.

The reason for the invention of “administration” in the insolvency regime was to enable a more measured wind-up, disposal or restructuring of a business rather than a liquidation. But insolvency practitioners (i.e. administrators) seem to have changed it into a short-cut to wind-up. Reform is surely needed.

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

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Conviviality – More Bad News, and IQE

I commented on the profit warning from Conviviality (CVR) on the 9th of March and the dangers of share tipping. Today the news is even worse. They have overlooked a payment of £30 million to HMRC due at the end of the month, so their cash flow forecast is blown asunder. They will breach their banking covenants unless some short-term funding is obtained to fill the hole. Meanwhile the shares have been suspended, and the dividend that was due to be paid on Friday has been cancelled.

I hope my previous comments dissuaded some investors from picking up these “bargain-basement” shares, but not all it seems. One of the punters was Stockopedia commentator Paul Scott. To quote his latest comment on it: “What can I say? It’s total incompetence”. It seems he was persuaded that the situation regarding banking covenants was OK after reading a positive broker note. But it seems likely the broker was relying on what the company told them.

I think there is one thing to remember when investing in companies and that is always to ask the question “do you trust the management”. Any announcements by companies should be always doubted unless the management have built up a track record of delivering on their promises and giving you the unvarnished truth. Regrettably, comments from brokers and other company promoters are never trustworthy in the modern financial world. When folks are being paid to say the right thing, or are financially motivated to do so, then whatever they say is likely to be dubious, or not the whole truth.

I have not commented on events at IQE before (I have never held the shares because it’s a sector I don’t like). But there was an interesting article by the Editor of Techninvest on the subject in the last edition (this is a publication focused on small cap technology companies and always worth reading). He commented negatively on shorting efforts by two companies while they published analyses of IQE’s accounts – effectively saying they were dubious. The company then issued a strong rebuttal and the shares bounced back. The shorters did not it seems consult IQE management before publishing, a pretty basic journalistic principle, particularly if you are going to publish negative allegations. The editor of Techinvest suggests scepticism should be exercised “given the vested interests involved”. I completely agree. One of the dangers of the modern internet is that folks can publish damaging stories with impunity, to their financial advantage. The Government and regulatory authorities surely need to tackle this issue sooner or later.

Whether the claims about the accounts of IQE have any basis in fact I would not like to comment upon. It would only stimulate more debate to no purpose when the real truth may be unknowable at this time. Investors should consider my comment above. Do you trust the management?

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

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