£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
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