Conviviality

It is a great name for a bar, but is a fancy name good for a quoted conglomerate plc? The shares were suspended on 14 March. The FCA and FRC need to look at this and asset managers need to think again why they missed the warning signs!

Shares in the wholesaler and distributor of alcohol and impulse are now suspended as it considers the anticipated impact on its funding position of £30m due to HMRC. This business has looked questionable since an abrupt change of strategy several years ago. The facts were there for all to see.

ShareSoc will shortly issue a press release saying

“Conviviality

• The FCA and FRC need to look at this.
• Asset managers need to think again why they missed the warning signs!
• Shares in the wholesaler and distributor are now suspended as it considers the anticipated impact on its funding position of £30m due to HMRC. This business has looked questionable since an abrupt change of strategy several years ago. The facts were there for all to see.
• Manifest spotted the problems. Why did institutions not listen to them?
• Despite this, shareholders approved the annual accounts – they voted 100% in favour, although only 72.81% voted. 2.85% voted against the reappointment of the Chairman, but there was no vote on remuneration and generally no signs of shareholder dissent. Why was this? Who were these shareholders? Were they asleep on the job? Or did they, lemming like, follow ISS advice and not look at Manifest’s concerns?
• These are important questions as a company previously worth £680m is now suspended, and it may go into administration and shareholders may lose all their money.

The rapid drop in the share price may be grounds for the FCA investigating whether the company had disclosed relevant information in a timely manner to the market.

There may also be questions about whether recent accounts have been a true and fair reflection of the business. The FRC should investigate this.”

A more detailed analysis follows, which members may find of interest:

Manifest, the corporate governance experts, in their report ManifestReportConvivialityplc1709  highlighted many problems when they analysed the 2017 annual report, including:

1. No performance evaluation process in place for the Board, individual directors and the executive board.
2. The Company has not put its remuneration policy or report forward for shareholder approval.
3. The Company has not provided all of the recommended governance disclosures.
4. Non-compliance with corporate governance code provisions has been identified, however the explanation for non- compliance has not been provided. As such the Company has failed to adhere to the comply or explain basis in its reporting.

Despite this, shareholders approved the annual accounts – they voted 100% in favour, although only 72.81% voted. 2.85% voted against the reappointment of the Chairman, but there was no vote on remuneration and generally no signs of shareholder dissent. Why was this? Who were these shareholders? Were they asleep on the job? Or did they, lemming-like, follow ISS advice and not look at Manifest’s concerns?

These are important questions as a company previously worth £680m is now suspended, and it may go into administration and shareholders may lose all their money.

Not only have Conviviality changed their promised strategy, they have paid themselves far too much (in my opinion) and own quite small amounts of shares. They also have a JSOP scheme. The ShareSoc remuneration guidelines say JSOPs are not appropriate. See https://www.sharesoc.org/ShareSoc-Remuneration-Guidelines.pdf

Let us name and shame the leading shareholders:

At 30 June 2017, the Company had been notified of the following interests of over 3% of the issued unused share capital:

Old Mutual

River & Mercantile Asset Management

Octopus Investments Limited

Premier Asset Management

AXA SA

Hargreave Hale Ltd Stockbrokers

Miton Group plc

Close Brothers Group

Unicorn Asset Management Limited

Jupiter Investment Management Holdings

Janus Henderson Group plc

Was the Conviviality (AIM:CVR) abrupt change of strategy ever questioned by naïve institutions?

In my opinion, the problems being encountered by Conviviality (AIM:CVR) date back several years to its material change of strategy.

The AIM Admission document from July 2103 stated the following:

“The management team, now led by Diana Hunter, an experienced retailer previously at Waitrose and Sainsbury’s, is implementing a strategy which the Directors believe will drive Franchisee engagement and growth over the next three years. The Directors expect to extend reach into new locations, penetrate further into the South of England, increase the Group’s convenience offering and further increase the focus on its wine offering.

The Directors believe that admission to trading on AIM will enable additional incentivisation of both Franchisees, through the implementation of an innovative Franchisee Incentive Plan that allows Franchisees to earn equity in the Company, and employees, through the implementation of employee share schemes.”

Section 7 ‘Strategy’ of the AIM Admission document, outlines the key elements of Diane Hunter’s strategy for the group. The comment on acquisitions was as follows:

“Acquisitions may be carefully considered in complementary segments of the market to assist growth in mid-affluent catchment areas.”

Institutions invested over £60m on IPO, in support of a ‘franchised off-licence and convenience chain’ business, with a defined growth strategy, but there was an abrupt change of direction.

The subsequent acquisitions of Matthew Clark for £198m in September 2015 and Bibendum for £60m in May 2016 had absolutely nothing to do with the original strategy.

Conviviality has been highly acquisitive over the past few years and has incurred plenty of exceptional costs which, for the period in question, included business integration costs of £4.1m and adjustments to accruals and provisions in the Bibendum PLB acquired balance sheet of £1.1m. As Conviviality regularly acquires other businesses integration costs occur with regularity, suggesting they are far from exceptional – costs to integrate and restructure the Group following the acquisitions of Matthew Clark and Bibendum last year were £8.7m!

– Fairy tale EBITDA

The interim results themselves were full of the usual references to the fairy tale that is ‘Adjusted EBITDA’, which naturally increased (adjusted EBITDA nearly always does!) but only by 1.7% to £23.3m.

– Horrid cash flow

We appreciate the period represents a low point in terms of cash generation but there have been some worrying elements.

Net working capital of £39m was 22% below the prior year net working capital of £50m as an increase in stock of £12m and debtors of £30m was offset by higher creditors of £53m.

There was an operating cash outflow of £3m (2016: £482k) with a further £10.5m of capital expenditure (Interims 2016: £8.8m) resulting in free cash outflow of approx. £13.5m.

Net debt at 29 October 2017 of £133.3m (30 April 2017: £95.7m) represented net gearing of 64% with leverage at 1.5x apparently below the bank covenant of 2.50x Adjusted EBITDA.

Trade and other payables of £322m suggests that suppliers are the main financiers of this business.

There is also a substantial receivables financing facility to consider as well.

– Receivables past due

Trade receivables at 30 April 2017 of £187m had a £2.8m impairment provision applied, which equated to 1.48% of the total. However, a subsequent note revealed that Trade receivables of £42.2m were past due but not impaired as these related to customers and Franchisees for which there is no history of default. The prior year ending 30 April 2016 quoted a comparable number of only £6.8m.

The ‘past due’ figure at 29 October 2017 was not stated in the interims so we will have to wait until the April 2018 year end to see how that is playing out in the current financial year.

Directors pay.

The Chief Executive’s total pay for the period ending May 2017 was a whopping £966,000 compared with £844,000 for the prior year. Directors remuneration for 2017 totalled £3.6m (2016: £2m) and equated to 19.5% of reported post tax profit of £18.45m. We are all for high rewards when deserved, but surely rewards should be linked to real achievement, rather than being aligned to costly acquisitions, high levels of exceptional costs and mere restructuring following acquisitions.

Excessive CEO remuneration

CEO remuneration for the Financial Years 2014 to 2017 has evolved as follows:

2014 £563k
2015 £581k
2016 £845k
2017 £966k

Clearly the above remuneration suggests she might have been able participate in the various placings – did those clever institutions forgot to ask her to join them!

It seems blatantly obvious that when a strong-willed management team seeks huge funding for a radically different business plan, the architects of such a change should be asked to commit meaningful equity in support, especially if they are being richly remunerated anyway.

It is worth noting the annual report says:

During this year, we have reviewed that framework and engaged in consultation with our major shareholders, holding around 60% of the share capital of the business, on two topics – executive bonus deferral, and the introduction of an extra level of potential LTIP, awarded in return for exceptional performance.

Feedback from the consultation exercise was taken into account in our approach going forward in these two areas of remuneration. The key changes in the annual bonus deferral arrangements are a mandatory deferral of 25% of any bonus earned, the opportunity to defer up to 100% at the executive’s discretion, the introduction of an extra allocation of shares as an incentive to do so, and the introduction of a three year holding period. For the Long Term Incentive Plan we have introduced a “super stretch” target with a 20% higher award potential, taking the CEO award to a potential 150% of base salary and other executive directors to 120%. A two year holding period has been introduced on top of the three year vesting period. Full details of Annual Bonus and Long Term Incentive Plans are outlined in the report.

Legacy schemes include

Joint Share Ownership (“JSOP”)

In respect of vested options granted by Conviviality Plc in respect of shares which are held by Bargain Booze EBT Trustees Limited (“EBT”), a wholly owned subsidiary of the Group, such shares were made subject of a Joint Share Ownership (“JSOP”) arrangement whereby the applicable executive and the EBT jointly own the relevant shares, with certain rights accruing to the relevant executive, including the right to dividends declared on such shares. This arrangement applies to 896,809 shares held by the EBT, of which 826,809 are jointly held by Diana Hunter and 70,000 are jointly held by Andrew Humphreys. No further joint share ownership arrangements are anticipated to be made to executive directors.

Such comments should have sounded alarms bells with fund managers and institutions, particularly when the remuneration report was not put to the vote (in direct contrast to The ShareSoc remuneration guidelines recommendation. See https://www.sharesoc.org/ShareSoc-Remuneration-Guidelines.pdf ).

Am I being too radical in suggesting that investment bankers, consultants, accountants, lawyers and other advisers on radical growth strategies and risky large acquisitions should be paid only if the company is successful, i.e. contingent pay, deferred for many years with clawback. Why should they have their fees paid up front in cash with none linked to long term company success?

Cliff Weight

Author’s note: I would like to thank Chris Boxall who has written extensively on this company and I have used as a source for much of my comments above. I should also declare that as well as being a director of Sharesoc I am also a director of Manifest.