July 1st, 2020: https://www.afr.com/companies/retail/disclosure-questioned-at-freedom-foods-20200701-p557wz
Disclosure questioned at Freedom Foods
AFR article, by Carrie LaFrenz, Senior reporter.
The disclosure around irregularities and the timing of investigations into the accounts at Freedom Foods Group have been called into question after heavy trading in the stock in the lead up to its suspension on June 25.
Industry insiders told The Australian Financial Review it was rumoured that former chief executive Rory Macleod was sidelined and “in real trouble” about six weeks ago as the company began consolidating its accounts for the end for the financial year reporting.
Two sources suggested disclosure could be an issue for the troubled cereals, snacks and drinks business, whose stock remains in a trading halt while it further investigates accounting and reporting shortfalls.
Freedom Foods is also is searching for a new managing director after long-serving Mr Macleod resigned Monday night less than a week after the exit of chief financial officer Campbell Nicholas, who had been in the role since 2016.
Their departures came as Freedom Foods flagged a blowout of $60 million in writedowns in obsolete stock dating back as far as 2017 – roughly half of its stock position from the first half of 2020. More writedowns are possible. PwC and Ashurst are investigating the company's financial position, including possible inflated asset valuations.
Executive chairman Perry Gunner said on a call to investors on June 23: "We're looking at everything. These matters have only arisen in the last 24 hours, 48 hours. I mean, we need to continue to investigate, continue to see what we can do about it."
However, one industry source questioned that timing. "It was rumoured that Rory was sidelined some time ago."
Another industry source, who also listened to the investor call and knows Mr Gunner said the "chairman's tone and approach – he was in complete shock".
A red flag was raised as far back as March 17 when the company told the ASX it proposed to issue up to 2.1 million securities to employees under its Equity Incentive Plan after the issue was not completed.
Mr Gunner clarified on the call to investors that the options were not being properly recorded, and therefore not properly valued at the time and "the charge was not properly identified, and included in the accounts".
A source suggested when the board realised there had been a disclosure issue around options, it should have triggered more investigations across the business, which should have been disclosed.
By May 29 – the day the company flagged $25 million writedowns in discontinued and obsolete stock and culled the interim and final dividends – 12.75 million shares changed hands. This was followed by 6.48 million shares traded on June 1 – which some corners of the market are calling questionable given the stock's average trading volume was just over 1 million shares per day.
Tony Perich and family, who control 54 per cent of the company, disclosed their spending over $3 million to buy shares over June 2 and 3. By June 24 – the same day Mr Macleod was put on "leave" but before a pause in trading – over 21.5 million shares traded hands.
As a matter of course, ASIC inspects trading in around announcements. A surprise departure of a CEO, and general governance would also catch the eye of the regulator.
One shareholder was not happy about the level of disclosure saying the board should have been highly alert to any irregularities in the current environment.
"To have two market updates saying that everything was okay, so encouraging people to buy stock, then to turn around and say actually we've got a problem, and then now to have this one is incredible," he said.
Sources said the events that have transpired showed the lack of rigour on the audit committee, as well as failure by the external auditors, Deloitte Touche Tohmatsu.
"Categorically – external auditors – have to take some responsibility," said one industry source. "The audit committee should be meeting with auditors and picking up on the flags of the auditors."
Freedom Foods, which declined to comment, is the largest supplier of almond milk to supermarkets through the Blue Diamond Almond Breeze brand and also makes So Natural and Vitalife soy and dairy drinks. Other brands include Freedom breakfast cereals, Messy Monkeys and Heritage Mill snacks.
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Carrie LaFrenz has more than 10 years' experience as a business journalist having previously covered healthcare, retail/consumer goods, industrials and agribusiness. She is based in the AFR's Sydney newsroom.
Further Reading:
https://www.farmonline.com.au/story/6813788/boss-macleod-leaves-troubled-freedom-foods-as-books-get-fresh-audit/?cs=14138
https://www.afr.com/companies/manufacturing/freedom-foods-ceo-resigns-20200630-p557kb
https://www.afr.com/street-talk/goldman-sachs-runs-numbers-on-freedom-foods-drops-conviction-20200702-p5589y
AFR: Street Talk: Goldman Sachs runs numbers on Freedom Foods, drops conviction
by Sarah Thompson, Anthony Macdonald and Tim Boyd
July 2nd, 2020:
Embattled cereals, snacks and dairy company Freedom Foods rocketed to the top of equity raising watchlists last week when it announced a $60 million inventory write-down and its CEO and CFO left the building.
Talk about a triple whammy for shareholders.
Analysts at Goldman Sachs have modelled what a $150 million equity raising would mean for shareholders, who are already bracing for the stock to tank once PwC and Ashurst finish an investigation into Freedom's finances and it resumes trading.
In a note to clients on Thursday, the analysts said earnings per share could drop by between 18 per cent and 27 per cent depending on how deeply discounted the offer was.
The analysts said a $150 million equity raising would reduce Freedom's net debt to EBITDA to 2.5 times by December 2020.
Without a raising, Goldman Sachs thinks Freedom's net debt to EBITDA would peak at 4.9 times in December 2020, before gradually falling to 2.3 times by June 2022.
Freedom has not disclosed its debt covenants to the market but the analysts estimated that it would be somewhere around 3 times on a net debt to EBITDA basis, based on the company's Australian and New Zealand peers.
Goldman Sachs noted that it did not "incorporate an equity raising into our numbers at this stage, although we highlight this as a key risk" and said its equity raising modelling was for "illustrative purposes only".
A potential equity raising is just another thing for Freedom Foods to consider. There's also matters including the PwC/Ashurt investigation targeting the company's financial position, the FY20 results and the appointment of a new CEO and CFO.
In the meantime, the analysts removed Freedom Foods from the team's conviction list and downgraded the stock to "neutral".
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Sarah Thompson has co-edited Street Talk since 2009, specialising in private equity, investment banking, M&A and equity capital markets stories. Prior to that, she spent 10 years in London as a markets and M&A reporter at Bloomberg and Dow Jones.
Anthony Macdonald co-edits Street Talk, specialising in private equity, investment banking, M&A and equity capital markets. He has 10 years' experience as a business journalist and worked at PwC, auditing and advising financial services companies.
Tim Boyd is a journalist based in Sydney who writes for the AFR's Street Talk column.
[I don't hold FNP shares]
