Patisserie Valerie: no showstopper, just a soggy bottom...
The high street is having a torrid time, so it was surely a surprise to see that one chain, Patisserie Valerie, were one of the few businesses who were bucking the trend.
In the most recent accounts, Patisserie Valerie had cash reserves of £28.8m, but that cash appears to have disappeared, leaving a black hole that, without urgent action, would swallow up the business.
A little over two months ago, it was described as being just three hours away from bankruptcy, and narrowly escaped an HMRC winding-up order against Stonebeach Limited, one of its main subsidiaries, for the value of £1.14m.
So, what happened?
On the afternoon of Thursday 11th October 2018, Patisserie Holdings plc, the parent company of several brands including Patisserie Valerie, Druckers Vienna Patisserie and Philpotts, the sandwich retailer, announced out of the blue that, over the previous 24 hours, it had “reached the conclusion that there is a material shortfall between the reported financial status and the current financial status of the business.”
The company’s board had discovered ‘secret’, ‘unauthorised’ overdrafts with HSBC and Barclays, totalling £9.7m. The founder, the board and auditors were apparently unaware of the existence of this facility.
The holding company of the chain, Patisserie Holdings, announced it required an immediate injection of capital to continue trading, and it was revealed that up to 2,800 jobs could be at stake if the business collapsed.
On the 12th, the following day, the Serious Fraud Office confirmed it had opened a criminal investigation.
This example illustrates the huge risk to businesses that can be posed by potential insider fraud. For small businesses and suppliers to Patisserie Valerie, it also highlights the need for continued due diligence on even the largest of businesses (this was a business valued at £440m just one month before the black hole was revealed!), to ensure that their risk is managed.
This episode has further increased the pressure on the audit sector, with questions being asked of Grant Thornton, the auditors who signed off on the accounts dated September 2017.
Following the emergency meeting called by founder Luke Johnson - who personally put up £20m of his own money to keep the group afloat - the company sought shareholder approval to raise £15.7m, but from the sale of heavily-discounted shares to institutional investors, which angered many of the business’ existing shareholders.
More worryingly, it emerged on Thursday 17th January that the “past misstatement of accounts was extensive, and involved thousands of false entries into the company’s ledgers”, according to the Financial Times.
Following the news that advisors from KPMG were appointed to help the business ‘review its options and secure value for stakeholders’, a second director, and deputy chairman, resigned from the board in a little under a week, leaving Luke Johnson, the executive chairman, as the only board member to remain in their post since the crisis emerged.
A little under a week later, discussions with the chain’s lenders, HSBC and Barclays, with the aim of extending a standstill agreement, came to nothing, and Patisserie Valerie collapsed into administration.
KPMG now seeks a buyer for the business, and are hopeful for a good level of interest, but this example demonstrates how size is no guarantee of security, and no business is too big to fail due to fraud.
The proof of the pudding is in the eating. And for the café's employees, customers and shareholders, it has left them with a taste that is very bad indeed!