Conviviality calls in administrators, putting pub supplies at risk

Following the previous day's announcement that it was talking to banks and advisors about a possible sale of the business after failing to scrape together a £125m emergency fundraising, the AIM-listed company said on Thursday that it intended to appoint administrators. Perhaps tellingly, it said this will happen "unless circumstances change".

Earlier in the month, after being surprised by a £30m tax bill and suspending its dividend and trading in its shares, Conviviality hired PricewaterhouseCoopers, the same advisors that worked with the collapsing Carillion, to help with discussions with HMRC, its lenders, credit insurers, suppliers and other creditors.

Administrators, thought likely to be PwC, will be brought in within 10 business days to the the drinks retailer and wholesaler, though secured creditors can bring this forward should they choose.

Management, which no longer includes chief executive Diana Hunter who departed last week on the back of the series of profit warnings, intend to allow the business to continue to trade. They will continue to work with advisers to try and preserve as much value as possible in the business, including "a number of inbound enquiries regarding a potential sale of all or parts of the business".

Two weeks ago the company said it would try drum up funds from a share placing, saying that tax authorities, creditors and customers were remaining supportive.

Its wholesaling arm, made up of the Matthew Clark and Bibendum businesses, is a major supplier to the industry, serving more than 23,000 pubs and restaurants, including the JD Wetherspoon chain, as well as 700 off-licences.

A collapse of the company puts 2,600 jobs at risk and is likely cause supply issues for pubs, the British Beer & Pub Association said, though the body was working with its members to assess the impact of the ongoing issues.

“Alternative suppliers will be sought in order to minimise the impact on the trade as far as possible, but inevitably a situation like this will likely cause short term supply issues for pubs.”

Shares in Conviviality remained suspended on Thursday, while customer JD Wetherspoon was down 1.5% to 1,148p.

INTERESTED BUYERS?

There could be potential interest in buying Conviviality, or at least parts of it, from private equity and UK supermarket groups, convenience and grocery groups, high street value retail chains and wholesalers.

Alongside Sainsbury's, Tesco, Morrisons and Asda, analysts Phil Carroll and Clive Black at Shore Capital suggested companies such Costcutter and Spar due to the recent consolidation of the supply chain seen with Tesco buying Booker, Coop buying Nisa, Morrison’s owning McColls and Sandpiper.

"We also believe other wholesalers such as Bestway and Landmark may have an interest. Then we also expect interest from the brewers both the global majors and the smaller UK listed businesses. However, such interest is only likely to be in Matthew Clarke and Bibendum. Heineken would be our first choice but also AB Inbev, who we believe used Matthew Clark.

"More, locally, we believe Marstons, which has been investing in its beer business or C&C Group, which already has a beverage distribution model in place in Scotland and Ireland could be seeking to speak to PWC. Interestingly, C&C has shifted distribution in England & Wales to AB Inbev so some interesting talks could be taking place between those two parties."

Leisure analyst Mark Brumby at Langton Capital said the speed with which Conviviality has unravelled will unsettle investors, suppliers and customers. "The vague concerns led to a £30m liability led to the resignation of the CEO led to the scrabble for £125m led to the possible administration of the company, etc."

He said a potential source of problems is the extremely low-margin nature of the majority of the businesses that Conviviality was involved in, a problem it shared with Carillion.

"It is harder to survive shocks when margins are low," Brumby said. "The antidote is perhaps to be incredibly well-run or to have cash margins that are higher than those disclosed in the P&L courtesy of high depreciation or other non-cash payments. Amongst pub companies, JDW perhaps satisfies both of these criteria. Others may not be in quite such an advantageous position."

TIMELINE OF A RAPID COLLAPSE

It was only at the end of January that the company upped its interim dividend and said it was trading in line with the board's full year expectations after a “robust” half-year where revenue and adjusted EBITDA increased but profits slipped in what was blamed on the phasing of cost synergies into the second half of the year.

Hunter said at the time that the board had made the "deliberate" choice to focus on growing market share and enhancing future earnings by agreeing long-term contracts with the firm's larger customers, and securing new national account customers.

“These gains in market share coupled with our continued strong sales demonstrates our competitive advantage, the broad customer base we have developed and the robust nature of Conviviality as the UK's leading drinks wholesaler, distributor and solution provider to our customers.

By 8 March, the tune had changed dramatically after the discovery of a "material error" in the financial forecasts of the Conviviality Direct wholesaling business, meaning EBITDA would take a £5.2m hit.

Hunter said adjusted EBITDA for the full year was now likely to be around 20% below current market expectations, though assuring there had "has not seen material weakness in overall demand".

A week later, the bad news kept on coming as Hunter cancelled the interim dividend after a £30m tax bill popped up unexpectedly, putting pressure on its banking covenants. The HMRC payment had not been recorded in its short-term cash-flow projections.

"Following preliminary advice received from PwC, whilst there can be no guarantee, the board believes this short-term funding requirement will be satisfactorily resolved," the company said.