£30m res­cue deal ig­nored by Patis­serie Va­lerie bosses

Cafe chain needed an emer­gency loan af­ter a saga in­volv­ing fraud po­lice and a hole in the ac­counts, write Oliver Gill and Ben Woods

The Sunday Telegraph - Money & Business - - Front page - By Tom Rees and Jack Tor­rance

PATIS­SERIE Va­lerie’s man­age­ment snubbed a £30m deal that would have pro­tected small in­vestors, it has been re­vealed, as fu­ri­ous share­hold­ers rounded on the com­pany last night.

In­vest­ment fund Crys­tal Am­ber was plot­ting a con­vert­ible debt deal to res­cue the firm which would have meant in­vestors would not have seen their stakes di­luted by the emer­gency fund raise that of­fered up new shares at a huge dis­count.

A top 15 in­vestor said there are “so many ques­tions to ask of man­age­ment, board and au­di­tors in terms of how was it not spot­ted much ear­lier”.

Patis­serie Va­lerie staved off col­lapse on Fri­day, suc­cess­fully tap­ping in­vestors for £15m and se­cur­ing two £10m loans from chair­man Luke John­son. It is thought that Mr John­son par­tic­i­pated in the eq­uity raise, which was limted to large-scale in­vestors, but it re­mains un­clear whether his 37pc stake was di­luted. Crys­tal Am­ber’s head Richard Bern­stein said that the place­ment had pro­tected Mr John­son’s for­tune locked up in his stake from be­ing wiped out. He added: “Two thirds of the eq­uity raise is go­ing to pay back the man who owns £166m of shares that would be worth zero without a raise.”

Crys­tal Am­ber, which does not hold a stake in the firm, told Patis­serie Va­lerie’s bro­ker Canac­cord Ge­nu­ity that it was pre­pared to of­fer up to £30m to engi­neer a res­cue but was “ig­nored”. On Thurs­day as Patis­serie fought for its sur­vival, it wrote to Mr John­son who did not re­spond. The com­pany could not be reached for com­ment.

In­vestors and banks were wrong­footed by the com­pany’s trou­bles. As­set man­age­ment gi­ant Aberdeen Stan­dard, a top 15 in­vestor, called it “an en­tirely un­fore­seen sit­u­a­tion” while City sources said HSBC, whose Birm­ing­ham-based team had ex­tended the com­pany a £4m over­draft, only found out on Wed­nes­day morn­ing.

Chris Marsh, the fi­nance chief at the cen­tre of its fi­nan­cial catas­tro­phe, cashed in mil­lions of pounds worth of shares in the busi­ness this year and has been in­volved in a string of busi­nesses that have run aground. Mr Marsh was ar­rested on Thurs­day and re­leased on bail af­ter the café chain sus­pended its shares. He is now the sub­ject of an in­ves­ti­ga­tion by the Se­ri­ous Fraud Of­fice into the cri­sis. Mr Marsh has sold more than £5m worth of shares since Patis­serie Va­lerie floated four years ago, the vast ma­jor­ity of them in the past eight months. His share op­tions were worth £2.8m and £2.4m re­spec­tively, mak­ing him a to­tal profit of £2m.

Mr Marsh and Mr John­son held the same roles at Healthy Liv­ing Cen­tres, a chain of fit­ness clubs, from 2004. It is un­clear whether they had ex­ited the com­pany be­fore it went un­der in 2008. They also col­lab­o­rated on the res­cue of Fish­works, a chain of fish restau­rants. Mr Marsh left the year later and the busi­ness found it­self in need of an­other res­cue.

On Thurs­day night, Patis­serie Va­lerie’s par­lous po­si­tion brought po­lice to the wrought iron gates of a quiet neigh­bour­hood in a com­muter town just north of Lon­don. Be­yond them lies a lit­tle pocket of sub­ur­bia where mil­lion-pound houses hud­dle around a quiet cul-de-sac pep­pered with fallen leaves.

Of­fi­cers from Hert­ford­shire Po­lice had come to this St Al­bans street for Chris Marsh, the cake-chain’s fi­nance di­rec­tor. A fran­tic search for an­swers as to why the busi­ness had been left with a gap­ing hole in its fi­nances had led to this mo­ment.

Marsh, who was sus­pended from his role ear­lier in the week, was ar­rested at his home on sus­pi­cion of fraud and re­leased on bail. A crim­i­nal in­ves­ti­ga­tion by the Se­ri­ous Fraud Of­fice had be­gun.

The 44-year-old’s ar­rest marked a crit­i­cal point in a rapidly-evolv­ing story that be­gan on Tues­day night when news broke that Patis­serie Va­lerie had dis­cov­ered a deeply-un­set­tling ir­reg­u­lar­ity in its ac­counts.

Spec­u­la­tion has been rife ever since over the mul­ti­mil­lion-pound short­fall. As the saga plays out, the rep­u­ta­tion of Luke John­son, the Pizza Ex­press mas­ter­mind and one of Bri­tain’s best-known en­trepreneurs, has been tar­nished.

Now that the busi­ness has been saved he will be dogged by ques­tions about how it hap­pened on his watch. He is, af­ter all, the ex­ec­u­tive (rather non-ex­ec­u­tive) chair­man of the Aim-quoted out­fit. Ex­perts warned that any res­cue deal would leave the com­pany’s stake­hold­ers with ma­jor trust is­sues.

Patis­serie Va­lerie started its life in 1926, when Bel­gian­born Madame Va­lerie opened its doors in Soho, cen­tral Lon­don. Her mis­sion was “to in­tro­duce fine con­ti­nen­tal patis­serie to the English”.

When her Frith Street store was flat­tened by the Luft­waffe dur­ing the Sec­ond World War, Madame Va­lerie kept calm and car­ried on, mov­ing round the corner to Old Comp­ton Street. It wasn’t un­til the late Eight­ies that the Scalzo broth­ers bought the busi­ness and ex­panded it to nine branches.

John­son, how­ever, must be cred­ited for the rapid ex­pan­sion of what Patis­serie Va­lerie is to­day. The chain is home to some 206 shops em­ploy­ing 2,500 staff.

Trou­bles at Pat Val – as John­son is un­der­stood to call it – first sur­faced late on Tues­day evening. Re­ports emerged of a “£20m or more” black hole amid ac­count­ing ir­reg­u­lar­i­ties.

At 7.30am on Wed­nes­day, the news – al­beit not the quan­tum – was con­firmed. The board had be­come aware of “sig­nif­i­cant, and po­ten­tially fraud­u­lent, ac­count­ing ir­reg­u­lar­i­ties and there­fore a po­ten­tial ma­te­rial mis-state­ment of the com­pany’s ac­counts”.

Shares were sus­pended with John­son ex­press­ing “deep con­cern” at the sit­u­a­tion. Im­ply­ing this was as much of a shock to him as it was for every­one else, John­son said he was “de­ter­mined to un­der­stand the full de­tails of what has hap­pened”. Most in the City were left scratch­ing their heads. The ac­counts looked clean, fund man­agers and an­a­lysts re­marked. No Car­il­lion-style funky work­ing cap­i­tal build-up. Steady rev­enue and profit growth and no fun­nies in the cash-flow state­ment.

The an­nounce­ment also caught Patis­serie Va­lerie bankers off-guard. City sources said HSBC, whose Birm­ing­ham-based team had ex­tended the com­pany a £4m over­draft, found out on Wed­nes­day morn­ing.

Share­hold­ers were left sim­i­larly baf­fled. Oc­to­pus In­vest­ments, a small-cap spe­cial­ist and Patis­serie Va­lerie’s sec­ond-largest share­holder, said: “We don’t have any more in­for­ma­tion than is in the pub­lic do­main.”

As­set man­age­ment pow­er­house Aberdeen Stan­dard called it “an en­tirely un­fore­seen sit­u­a­tion”.

Within hours there was an up­date. The com­pany had un­earthed an un­paid tax bill of £1.14m. Pay it off and all would be well, some would think.

Un­for­tu­nately not. Ex­as­per­ated of­fi­cials from HM Rev­enue & Cus­toms had given up de­mand­ing pay­ment and filed a wind­ing-up pe­ti­tion with the High Court on Sep 14. The com­pany had buried its head in the sand. The “winder” had been ad­ver­tised in The Lon­don Gazette on Oct 5. A court date of Oct 31. Pub­li­ca­tion in the of­fi­cial record causes huge com­pli­ca­tions.

A chain re­ac­tion is sparked that can see other cred­i­tors “pig­gy­back” the pe­ti­tion and de­mand pay­ment. Bank ac­counts are usu­ally frozen, mak­ing day-to-day pay­ments a painfully bureau­cratic process.

Philip Mar­shall QC from Serle Court cham­bers said it was “quite ex­tra­or­di­nary” that a listed com­pany had been served a wind­ing-up pe­ti­tion by HMRC. A “whole host of warn­ing let­ters must have been ig­nored” by the com­pany, he said.

John­son’s blushes have not been spared. Only weeks be­fore, he had used his Sun­day Times col­umn to lay out a 12-point ar­ti­cle for spot­ting a fraud en­ti­tled: “A busi­ness be­gin­ner’s guide to tried and tested swin­dles.”

Fraud­sters’ tricks have not changed so much over the last cen­tury, he wrote. Run a cash busi­ness if you want to “dis­guise ne­far­i­ous ac­tiv­i­ties”, he said. “Then HMRC, banks, au­di­tors and oth­ers find it hard to mon­i­tor real tak­ings.”

Mean­while, John­son’s close re­la­tion­ship with Marsh can be traced back many years and ex­tends be­yond Patis­serie Va­lerie.

The pair have worked hand-in-hand since 2006 to grow Madame Va­lerie’s busi­ness from turn­ing a £30,000 an­nual profit to one mak­ing more than £20m.

They have also clubbed to­gether on Fish­works, a restau­rant chain which briefly col­lapsed into ad­min­is­tra­tion in 2009, only to be saved by 2 Sis­ters chicken ty­coon Ran­jit Boparan.

Marsh, who qual­i­fied as a char­tered ac­coun­tant with Big Four firm EY, has been Patis­serie Va­lerie’s fi­nance di­rec­tor since 2006.

He has a stake in the com­pany worth just over £2m with fur­ther share op­tions cur­rently worth ap­prox­i­mately £1.7m un­der the chain’s 2014 long-term in­cen­tive plan.

John­son’s pug­na­cious ap­proach has seen him viewed favourably up un­til now, de­spite the en­tre­pre­neur seem­ingly run­ning out of magic dust in re­cent years.

While Patis­serie Va­lerie’s in­sti­tu­tional back­ers will no doubt be in­censed with him and the com­pany’s man­age­ment, they have still helped se­cure the com­pany’s fu­ture.

John­son has agreed to pump £20m into the busi­ness. It will come through a £10m loan and a sec­ond £10m bridg­ing loan to help the busi­ness meet its debt re­pay­ments, in­clud­ing the out­stand­ing bill to the tax­man.

That fi­nan­cial pack­age was con­tin­gent on in­vestors hand­ing over £15m through an emer­gency share plac­ing.

The 92-year-old chain now ex­pects rev­enue for the year end­ing Sept 30 to be ap­prox­i­mately £120m while its earn­ings be­fore in­ter­est, tax and other items would be £12m.

While the blame has yet to be ap­por­tioned for this sorry saga, in­vestors have been sad­dled with the re­spon­si­bil­ity of sav­ing the day.

A de­ci­sion not to would have likely sent the cake-and-cof­fee em­po­rium crash­ing into ad­min­is­tra­tion.

Only weeks be­fore, John­son had writ­ten a 12-point ar­ti­cle for spot­ting fraud en­ti­tled: A busi­ness be­gin­ner’s guide to tried and tested swin­dles

Luke John­son, the ex­ec­u­tive chair­man of Patis­serie Va­lerie, has ques­tions to an­swer about how this hap­penedon his watch

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