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The Conviviality Firesale - Roger Lawson right but also wrong

By Tom Winnifrith | Tuesday 10 April 2018


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


My new best friend Roger Lawson of ShareSoc has written about the firesale of Conviviality (CVR) assets. He is right but also wrong. What has happened tells us as much about the illusion of asset backing as it does about the way administration works.

To recap. The administrators have sold the off-license retail chains Bargain Booze and Wine Rack to Bestway for £7 million and the wholesale division, Matthew Clark and Bibendum, to C&C for £1, although the new owners have taken on some of the debts owed.

Matthew Clark was bought by Conviviality for £200 million three years ago and Bibendum was bought for £60 million in 2016. This is, as Lawson rightly points out, a firesale. I assume that in the last annual accounts these assets were in the books at, at least, the purchase prices. That was probably fair in that as going concerns, reporting profits and generating cash you could have justified such prices. No doubt the annual impairment review found no need for writedowns.

The problem is that when a business is known to be in trouble its value plunges, especially when like the wholesale units it was a business whose real assets were not bricks and mortar or cash but people and contracts which are worth sod all if one side might default. So it is not that the auditors goofed on this although I am still amazed that they did not have very stern words with a management team that thought paying a dividend, when the company had negative net current assets, was a prudent move.

But it is a reminder that while asset backing can in some cases offer downside protection on your investments that is far from always being the case. It certainly suggests that when disgraced ex CEO Diana Hunter was racking up huge debts buying certain businesses she was NOT doing so with any margin of safety, she was not value investing other people's money.

Lawson's notes that:

"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. "

Ends

Well what has happened is irking especially for shareholders who always get wiped out in this situation. It leaves a bad taste in the mouth especially as we consider that some folks - the advisers, administrators, Ms Hunter - will be walking away with wallets bulging. In that I agree with Lawson.

But that is the nature of investment. Equity holders get far more upside than providers of loan finance but have far less downside protection. It is risk reward and when a company runs out of cash it is the loan providers who call the shots. It may not seem equitable for shareholders in Conviviality but when the business was, apparently, flying it is they, not the banks, who enjoyed the upside of share price gains.

As for the speed of the process.. a business like Conviviality is a deteriorating asset. Customers and suppliers will change the terms of trade or cease doing any trade at all once they see that it is in trouble. The administrators have at least recouped something for creditors by moving quickly. Each day they delayed - whatever chapter 11 type protections were put in place - would have seen the value of the assets diminish and almost certainly put even more jobs at risk.

Capitalism is not fair or equitable. Different stakeholders make different gains or losses. You just have to play your part but be aware of the risks. Tweaking the system is not going to change that.


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