Patisserie Holdings (CAKE) – Going down like a wet victoria sponge
It’s not often a few million quid goes missing. But it’s the second time this year now that it has, after Conviviality’s (CVR) cratering back in March. On Tuesday night a story broke that £20 million had gone walkies and on Wednesday, CAKE shares were suspended. It has always struck me as the sort of share you buy if you have too much money and wish to diversify, so hopefully those who are holders will not see any material changes to their investment portfolios. It’s never nice seeing people lose money.
Winding up order
Somehow, the company only became aware of a winding up petition against Stonebeach (the company’s primary trading subsidiary) two days ago, despite this being filed on 14 September. It’s a staggering failure of oversight that the board did not know about this. It was even advertised in the London Gazette a week ago. The efficient market was obviously not efficient this time and did not price in the fact that something very bad would happen to CAKE stock within the next few weeks if the £1.14 tax bill was left unpaid.
Finance Director arrested
The company FD, Chris Marsh, who was (unsurprisingly) suspended and arrested last night has been released on bail this morning. Someone should almost certainly go to jail for this, because such ineptitude can either only be fraud or gross misconduct. Serious pressure should be placed on the auditors too, Grant Thornton, who have been signing off the accounts. Perhaps only a cynic would believe that auditors are willing to let some things slip in order to keep the account, and they just hope nothing ever implodes as badly as CAKE has. Perhaps it is entirely a coincidence Chris Marsh had exercised his share options and sold them immediately, pocketing £679,999.
Famed for Pizza Express success, Luke Johnson was likely hoping to be able to repeat this with Patisserie Valerie. One cannot really imagine how he must have been feeling when he realised that his £165m shareholding (at time of suspension) could actually be worth £0.
It is difficult to believe that this has happened on his watch as Executive Chairman. You only really expect this sort of thing from dodgy AIM junk where directors have no shares themselves yet happily appear on rampcasts to pump their stock – and yet it has happened.
It is not just him that will lose out. Other shareholders own 63% of the company too. For the sake of clarity, I am not blaming Luke Johnson for what has happened – he has more reason than anybody else on the planet to see Patisserie Valerie be a success. Somebody is to blame though, and in time we will find out who.
Could this have been avoided?
We all love the romanticism of Warren Buffet and his hold for life methodology. But sadly things can and do go wrong. If the board aren’t in control of their company how can anyone else make an accurate decision? The directors of Conviviality were actually buying shares two weeks before the administrators were appointed. One would argue that the sage of Omaha would have met the management and decided against them as an investment proposition but the reality is that Buffett has also benefited from luck. Skilled – of course, but lucky. If you do not factor in the possibility of black swan events and diversify then every one in hundred times you will be wiped out.
In the end, I don’t believe anyone could have avoided CAKE, and current shareholders should not be kicking themselves at a mistake (unless they were 100% long CAKE stock in their portfolio, in which case you are a donut for not diversifying!)