Fund managers have branded Patisserie Valerie's collapse as 'scandalous', after the high street baker fell into administration less than a week after revealing the scale of 'devastating' fraud.
Patisserie Holdings (CAKEP) announced yesterday that it had fallen into administration ‘as a direct result of the significant fraud’ and that banks had refused to bail out the parent of high street cake maker Patisserie Valerie.
Chris Boxall, co-founder of Fundamental Asset Management, said he was considering legal action against the business.
‘It’s a scandalous situation and in nature unprecedented in our experience,’ he said. ‘A simple, cake and coffee shop group, the easiest business in the world to understand, goes from a value of £580 million to zero value in less than four months, without warning.’
Since floating on the Alternative Investment Market (AIM) in 2013, Boxall said Patisserie had reported clean numbers, had self-funded growth through its own cash flow and had been paying a dividend. He was therefore perplexed as to how Patisserie could have gone from having £28 million in cash on its books into the red, after finding a £40 million black hole in its accounts.
‘No red flags or concerns and trade in its London and South East cafés (we regularly visited many) was good,’ he said.
Boxall, who manages portfolios of AIM stocks on a discretionary basis for investors, had exposure across many of his segregated funds but said the impact of the scandal was small. He hoped investors would not be put off investing in smaller companies by the debacle.
‘Nevertheless, we are staggered and saddened by the failure of Patisserie Holdings, a business which had presented clean numbers which are now found to be works of fiction,’ he said. ‘The directors, auditors and bankers have a lot to answer for.’
In yesterday’s announcement, Patisserie Holdings said chairman Luke Johnson had offered to put a further £3 million into the business to cover staff’s January wages. The loan was also to help administrators, KPMG, 'in trading as many profitable stores as possible while a sale process is undertaken'. Johnson had already loaned the business £20 million of his own money to keep it afloat.
Last week, Patisserie Holdings revealed it had discovered ‘thousands of false entries into the company’s ledgers’ and that 'the misstatement of its accounts was extensive, involving very significant manipulation of the balance sheet and profit and loss accounts'. It therefore expected cash flow and profitability to be ‘materially below’ what it announced before the accounting hole became apparent.
Phil Harris (pictured), who had a 1.8% stake in Patisserie in his £162.4 million EdenTree UK Equity Growth fund when the scandal broke, but baulked at taking part in the company's rescue rights issue in November, was not surprised by yesterday's news.
‘All that remains now is hopefully to save as many stores and jobs as possible,’ he said. ‘Then I think we need a detailed investigation and thorough and rapid answers on how, not just a listed company, but one that had relatively recently [floated] could have passed a detailed audit and the fraud was not picked up.’
Citywire-AA-rated manager Paul Mumford, who runs the £66.4 million Cavendish AIM fund, similarly said the collapse of Patisserie Valerie seemed ‘inevitable’ given last week’s revelation of the scale of the fraud.
Before Patisserie shares were suspended in October after the accounting blunder was discovered, when shares were worth 429p, Mumford had a 1.6% weighting to the business in his fund.
When the scandal broke, he wrote the value of the shares down from 50p to 25p.
He then invested a further £100,000 in October as part of its deeply discounted £15 million rescue share placing.
Mumford (pictured) shared his dismay, saying that he invested in the emergency fund raise on ‘good faith’ based on forecasts of £12 million profits.
‘The unfortunate initial discovery [of money missing from its accounts] was a shock but big if not bigger news was that it was on target to make £12 million which isn’t the case,’ he said. ‘Now that looks like a fanciful figure.’
‘People who committed large sums of money in the rights issue would be very unhappy that was on the basis of a forecast that was erroneous,’ he added.
Following last week’s update he then wrote the shares down to 5p and has now reduced that down to 0.01p as a formality to keep the shares on the fund’s balance sheet.
Other investors involved in the rights issue appear to have included fund group Invesco, which upped its stake in Patisserie to 7.8%. Jonathan Brown held shares in his Invesco Perpetual UK Smaller Companies (IAT) investment trust and fund of the same name.
Meanwhile, BlackRock Income & Growth (BRIG) investment trust said Patisserie was the largest detractor from its performance in its 2018 annual results.