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Added 2 weeks ago
#Bear Case

You must only put chips on a roulette table that you can afford and expect to lose, same with RFG.
1. new management's lack of retail food experience
2. lack of capital (despite some recent raisings) - net assets ($15.7M)
3. BS with $256M Intangible Assets v. Total Assets of $445M (FY2019)
4. $263M in bank loans from some very nervous bankers
5. Threat of a number of possible class actions
6. Ongoing ACCC Investigations
7. Ongoing ASIC Investigations
8. a lack luster economy that can do without doughnuts and pastries

Last edited 4 months ago
#Capital Raising

19-Oct-2019.  I have been very negative about Retail Food Group for a number of years now, particularly when they were up between $5 and $7/share.  When's founder, in his former role, said that he thought it was time to SELL RFG, that the final straw had been broken (no pun intended, much), and that his former investment thesis for RFG was now busted, i.e. things had turned decidedly pear-shaped and it was time to cut losses and move on (despite collegues disagreeing and still recommending RFG as either a hold or a buy on sister-services), I warned that they could easily fall to zero.  No matter how many times people thought they had likely bottomed, they could always go lower, until they got to $0.  I said there was no reason to hold through what was about to unfold.  I said a perfectly rational play would be to sell out and step aside - out of the storm - until it had passed.

I'm paraphrasing most likely; I am no longer a member of that service so I can't check my exact words, but the gist of it was that continuing to hold RFG was very risky and the risks of them going to zero eventually (if not sooner) were very real.  My comments were prompted by my own real-life experiences.  I've lost plenty of money in similar situations, where I was one of the true believers who "invested" with my heart instead of my head.  I've now learned never to fall in love with a company or, if you do, be prepared for a very quick divorce if you find that company has been unfaithful and has misled you.  I was trying to save people money, not be a smart arse.  It resulted in a few interesting debates.  Not everybody agrees.  That's what makes a market.  Nothing wrong with betting on a high-risk play, as long as you're only betting what you can afford to lose.  But don't bet any more than that!

So here we are.  October 2019.  RFG have NOT gone to zero.  Yet.  They closed at 17 cents on Thursday 10th (Oct), then announced a $160 to $170 million capital raising on Friday 11th - priced at 10 cents per share.  They closed yesterday (18th) at 14c/share.  Not zero yet, but getting pretty close.

This cap raising was then (as announced on the 15th) "upsized" to a $170M underwritten conditional placement plus an SPP (share purchase plan for existing shareholders) of up to $20M (all at 10c/sh).  So now a $190M raising, which formed part of a wider recapitalisation plan, with RFG’s existing senior lenders having entered into a binding commitment letter and term sheet, subject to various conditions including receipt of $118.5M of proceeds from the offer to be applied in partial repayment of the senior debt, by which the Lenders agree to extinguish $71.8M of existing senior debt ("extinguish" being another term for "write off") and to provide a new $75.5M term loan facility maturing in November 2022 to refinance existing senior debt, with new amortisation and covenants. To facilitate the Offer the Lenders have agreed to extend the existing facilities until 28 Feb 2020.

This was once again another last minute move to avoid (or mitigate) the breaching of RFG's lending covenants.  However - make no mistake - RFG's future is still firmly in the hands of their lenders - who are also in a difficult position because if they had NOT written off a large portion of the debt and extended the terms of the rest to allow this raising, RFG would have had to have been wound up, and the remaining assets (which are mostly substantially damaged brands) would have been sold off at fire-sale prices (what you often get when you're a forced seller).  The sales would never have covered the debt - leaving the lenders with massive write-offs anyway, almost certainly larger write-offs than what they have just agreed to.  So they are only doing what they consider to be in their own best interests.  As with Dick Smith Holdings, if RFG's lenders ever decide that winding up the company makes the most financial sense for them, they won't hesitate to do it.  It just didn't make sense right now - there was just TOO much debt there; They're instead getting people to pour more of their own money in to partially reduce that debt.

If you're unlucky enough to still be an existing RFG shareholder, should you participate in this SPP?  10c seems really cheap, doesn't it?  No. If you lose 100% of shares bought at 10c, you still lose all of your money.

In this announcement, they call this an "Equity raising and debt restructuring to successfully recapitalise the Company".   Not really.  They are partially recapitalising the company, but will still have substantial debt and will still have onerous lending covenants that are strongly linked to further debt reduction.  I don't see that they will have the money or the will to invest meaningful sums into revitalising their ailing brands and improving the lot of their struggling franchisees.  I think the pressure will still be there for further asset sales, and the NPV of RFG will still continue to shrink.  Still very high risk IMHO.

Last edited 4 months ago
#Bear Case

During the recent Forager roadshow, I had the opportunity to talk to Steve Johnson about his views on Thorn Group (TGA, which they own) and RFG (which they do not own), and he explained that he had serious concerns about whether RFG could even survive, let alone turn around.   I thought that both TGA & RFG were strong contenders to go broke, but he insisted that TGA were in way better shape.  However, he said that Forager wouldn't be buying RFG.  One of Steve's many concerns with RFG was their new banking/lending covenants and agreements with their banking syndicate, and he described some of the targets they had agreed to as being "totally unachievable", as well as leaving them in a position where they were unable to meaningfully reinvest in or resurrect their struggling brands.

I don't think it matters who is put in charge of RFG now, because they've gotten themselves into a position where it is virtually impossible to come back.  Even PE (private equity) would be very wary of RFG.  You can't buy the company without paying off the massive debt that they've got.  And what they own, which is virtually all just brands (rather than physical assets), is not worth anywhere near the amount of debt that they've got, so it's very hard to make a case that there is any value there - at all - for private equity.  What those guys like to do is buy companies with real assets, put in a high-profile/media-savvy manager, strip out the cash, do some fancy accounting, put some lipstick on the pig, then refloat the company.  Like they did with Dick Smith.  If they do a good enough job, the company doesn't fall apart for a couple of years, by which time PE is long gone.  That doesn't work with highly indebted companies such as RFG.


In the video that I've linked to below, James Marlay from Livewire talks to Steve Johnson (from Forager) and Mark Whittaker (from Investors Mutual) about what they look for in turnarounds and what makes them view some companies as being "terminal", i.e. unable to be resuscitated (or turned around).   Steve and Mark were each asked to bring along a real-life example of one or the other.  Steve chose RFG as his "terminal" example.  Mark chose ARQ as his positive-turnaround-opportunity example (although he made it sound more like quality at a bargain price).

I think Steve makes a pretty good bear case there for RFG.

Last edited 3 months ago
#Capital Raising

23-Nov-2019:  RFG held their GM on Tuesday this past week to have the shareholder vote on their debt restructuring package, and the resolution was passed with 93.77% for and 6.23% against.  Not surprising considering that in his Chairman's Address at the meeting RFG's Executive Chairman, Peter George, said that likely alternatives included RFG’s Lenders appointing receivers or selling the debt to a third party, who may impose more onerous debt terms on the Company, or, alternatively, the Directors may resolve to appoint administrators to the Company should they form the view that the Company is no longer able to pay its debts as and when they fall due.  

Not an easy thing to vote for in one way, with the SP of RFG down to 13c on Tuesday (they closed even lower yesterday at 11.5 cents per share) and the placement and SPP priced at 10 cps, and shareholders being diluted by this placement by more than 50% - the tiny value of their remaining shares being more than halved once more.  However, when the likely alternative is that the company gets receivers or administrators appointed by either the lenders or the company's own board, any deal that sees the company's shares remain on the boards is clearly a better option.

It was made abundantly clear that if the package was voted down, it was a "lights out" scenario.  The debt refinancing package was subsequently voted up, of course.

George thanked RFG’s Lenders, NAB and Westpac, for their "ongoing support and patience, and ultimately, for providing RFG a fresh opportunity to establish a new platform for stabilisation and business improvement."

As I've previously mentioned, banks always do what's in their own best interests, and this was the best option they could find to salvage some value out of this mess.

George finished his Chairman's address at Tuesday's meeting with this:  "Lastly, I would like to take this opportunity to once again thank each of you, our existing shareholders, for your ongoing support of the Company throughout the recapitalisation and restructuring process, and the challenging times which RFG has dealt with.

The recapitalisation is transformational for the RFG business and should enable the Company to continue to harness the underlying value of the Company’s franchise network and enhance franchisee profitability. I look forward to continuing the creation of a brighter future for RFG, and embarking on this next chapter in the Company’s journey with you."

Perhaps?  Or more spin?  The vast majority of this raising (placement + SPP) is going to debt reduction, with very little being retained for working capital, so while it gives them some breathing space, it doesn't give them the capital required to inject significant money back into their ailing business.  They still have a toxic relationship with a significant number of their franchisees, they have a poor industry reputation, they are struggling to attract new franchisees, they are trying to renogotiate existing rental agreements with shopping centres to reduce their costs, & they expect to increase foot traffic via marketing initiatives (which cost money).

Peter George said on Tuesday, "... your Directors consider that the Company will be afforded a stable and sustainable go forward capital structure and net debt position that will provide RFG with a material liquidity buffer whilst management continues to implement various cost reduction and performance improvement initiatives.  Driving franchise business performance through strategic initiatives is a key element of this. RFG is targeting an additional $30 million gross margin generation at the franchisee level from current initiatives, which contemplates savings derived from rent renegotiation and cost of goods reductions, operational improvements and improved foot traffic and sales derived from product category extensions and marketing programmes.  My vision for the Company is that RFG becomes a respected leader in both the domestic and international retail food and coffee arenas.  I believe that with the right support, the right team, culture, and strategy – this can be achieved."

Possibly. With the right support (1, including sufficient capital), the right team (2), the right culture (3) and the right strategy (4), they may be able to achieve that.  However, do you think they really have all of that sorted now?  It does conveniently give him 4 possible things to blame when things don't work out.

And he is sticking around for a couple of years at least.  They've just renewed his contract to 30 June 2022, including fixed remuneration of $600,000 per annum (inclusive of superannuation), accommodation provided proximate to the Company’s National Headquarters in Queensland and 15,000,000 (15 million) performance rights as part of his LTI plan, as voted up at this year's AGM.

It does sound risky taking shares in a company that could still go to zero, but he's hedging his bets - he is also receiving a one-off cash bonus of $300,000.


Disclosure: Not held.