Patisserie Holdings (CAKE) – Going down like a wet victoria sponge

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.

Luke Johnson

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!)




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    12 Oct ’18 – 11:44
    Talks happening as we speak to try and save Patisserie Valerie. I’m told that Luke Johnson not in a position to personally and immediately inject the needed cash to prevent administration, Update expected this afternoon or Saturday morning.” My wife and I got burned by Conviviality where the accounts fooled Questor, the Investors Chronicle, and the company’s own directors. The big issue is audits. We can’t go on like this. My wife is saying we should not hold any listed investments, we should go back to direct ownership of property. She feels we can’t trust published accounts any longer. Can you blame her for feeling like that? It’s bad enough that listed investments fluctuate in value all the time, but if you can’t trust the accounts it’s all just gambling, isn’t it?

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      Thanks Michael. Hope you don’t mind my throwing my two cents worth in. In my view, Conviviality was a bit different due to low margins, a high level of debt and the acquisition driven strategy. I would just say that it is worth thinking about what area that you invest in. If you wanted to be in the highest quality stocks then premium main market listed companies are probably the way to go.

      I don’t know if you had a chance to read the below article. But since 1996 the AIM market has gone nowhere. But the FTSE 250 is up 378%. I think both Conviviality and Patisserie Valerie were AIM listed. To reduce the chance of major loss/fraud I would probably focus on FTSE 350 stocks. If you wanted very low risk a FTSE 250 tracker isn’t bad or alternatively pick FTSE 100 companies in attractive sectors i.e. Intertek, Unilever etc. Fundsmith is also good in my view along with Lindsell Train.

      Factors to look for when seeking to avoid fraud or blowups in my view are 1) long history as a listed company. It is IPOs that often blowup. Both Conviviality and Valerie were fairly recent IPOs 2) Avoidance of acquisition driven companies (Conviviality) 3) Director shareholding over 5% 4) The type of sector. Construction is notoriously prone to issues.

      I can’t really say I am an expert or indeed know the basics of Valerie. However, I personally wouldn’t invest in that kind of area as tea/cafes seem to be hard to make work. There are no barriers to entry. When there is fraud at a smaller company it can go to the wall. If there is fraud at a larger company it can survive.

      In my view, an issue like Valerie is fairly rare. However, there were lots of Chinese companies on AIM before that turned out to be fraudulent. While AIM does definitely have good companies it is also where the bulk of frauds seem to happen for listed companies in the UK. A premium listed company on the main market has to pass certain listing and corporate governance requirements. The regulatory oversight is also much stricter.

  • comment-avatar

    It looks like CAKE will survive, albeit massively diluted after a proposed placing at 50p.

    I can accept businesses failing as part of the risk/reward. What I cannot abide is fraud and the lack of accountability of those supposed to protect private investors. I would love to see jail time served, but suspect that nothing will happen. If this disaster can befall someone like Luke Johnson, what chance do the rest of us have?

    PS: I don’t personally own CAKE, but feel very sorry for all that do.

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