29-Apr-2022: While the ASX200 fell 38 points over this past week, it did end the week on a positive note with a 78 point gain to 7435 (+1.1%). A positive lead from the US coupled with end-of-month book squaring and window dressing helped. There were also further rumours that Chinese stimulus is coming, which fed into the positivity. All sectors here were in the green today:

Source: EOD newsletter from MarcusToday

However, not all companies were in positive territory. One company I keep circling back to every so often is Retail Food Group (RFG). RFG closed flat today but during the day they tagged 6.5 cps ($0.065) again, as they did back in February. 6.5 cps is their 12-month low. I'm not a technical trader and I don't claim to be a "chartist", but the following chart analysis from Commsec on the RFG chart has me somewhat baffled:

I'm talking about that rubbish in the bottom right there directly below the share price and volume charts. They're in a "strong near-term rally" are they? OK?!?

I've said plenty on RFG before. Horrible company. Treated their franchisees very poorly. Always put short-term corporate profits before sustainable business development and doing the right thing by their shareholders, franchisees and other stakeholders. The only people that were truly looked after were their own management. Their MO was to roll up other franchise companies that had been built up by others, then strip out any cash, reduce costs, make a bundle, don't invest back into these businesses any more than they absolutely have to, rinse and repeat. Little wonder it all came crashing down around them after their business practices were exposed in the media.

Plenty of people still claimed there was a viable business in there that had been ridiculously oversold, but they just keep going lower. Here's their ten-year chart:

Not too much value there since 2016, eh! Notice the massive volume increase in 2020/2021. There was actually plenty of share price volatility during that period, however if you look at it in the context of their $4 to $8 trading range in the 2014 to 2017 period, it's pretty insignificant. Here is that 2020/2021 period when you zoom in on it:

Sources: Commsec + Invesco1.pdf + Invesco2.pdf + ASX (Announcements (asx.com.au))

Here's RFG's financial metrics, according to Commsec:

Remember you can click on the image to make it larger and easier to read, then click again to return to this post.

Despite some people saying that they no longer have a debt problem, their last report showed gearing at 66.8% according to Commsec. They have returned to high single digit ROE (9.5% at last report and 8% ROC) but their NTA per share is apparently negative two cents and their total shareholder return (TSR) has been negative for the past 5 years in a row: -10.8% in FY17, -88.1% in FY18, -75.9% in FY19, -46.1% in FY20 and -4.2% in FY21. They have underperformed the market in terms of total return by -25.1%, -100.7%, -87%, -38.9% and -34.5% respectively in those 5 financial years, as shown above ("Total Return (%) +/- Market (%)").

This is most definitely NOT a company where you can look at past performance, such as their 2015 to 2017 period, and look forward to them returning to that level of form. That ain't happening. They've sold off so many assets and restructured the business. They are not the same company they were then and they never will be. Have a look at those sales, cash flow and earnings numbers then versus now (above). They are but a shadow of what they once were. And that's being generous.

They obviously haven't paid a dividend since 2017 and are unlikely to start paying dividends any time soon, certainly not with the debt that they've got, so any positive return you get has to come from share price appreciation, and they just made a year low again on a positive day for the market.

If there is a genuine bull case for RFG I'd like to hear it. My own thoughts are that with so many WONDERFUL, HIGH QUALITY companies out there that we can invest in, WHY oh WHY do people look to "invest" in rubbish like RFG?

20-Oct-2021:  Michels Patisserie Class Action

Also:  https://themarketherald.com.au/retail-food-group-asxrfg-prepares-for-lawsuit-with-michels-patisserie-2021-10-19/

And:  https://thenewdaily.com.au/finance/finance-news/2021/10/19/rfg-class-action/

And:  https://www.corrs.com.au/retail-food-group-limited-class-action

And:  https://phifinneymcdonald.com/action/rfg-class-action/

The first three refer to a recent class action on behalf of Michels Patisserie franchisees and centres around RFG's switch from fresh to frozen food which many franchisees believed ruined the business, although there are other allegations involved also.

The last link is to the Phi Finney McDonald site which is part of their preparation for a class action against RFG on behalf of investors who acquired RFG securities (shares) between 18 April 2017 and 28 February 2018 (inclusive) (Claim Period).

Omni Bridgeway has agreed to fund the proposed class action. For more information and to sign up to obtain funding, please contact Omni Bridgeway at https://portal.omnibridgeway.com/cases/register/rfg-investor-class-action.

Some further info from that site:

Background

RFG operates franchise networks in Australia and 58 international markets. These include Donut King, Brumby’s Bakeries, Michel’s Patisserie, Gloria Jean’s Coffee, Crust Gourmet Pizza, Pizza Capers Gourmet Kitchen, The Coffee Guy and Café2U. RFG’s Domestic Franchise networks accounted for 49% of Group earnings before interest, tax, depreciation and amortisation (EBITDA) in FY16 and 43% in FY17. RFG enters domestic franchise agreements with its franchisees and, in so doing, generates revenue through royalties on sales, equipment/brand upgrades, store renewal and various other upfront and ongoing fees (the Franchise Model). These fees and royalties are payable to RFG regardless of the franchise’s profitability. A series of Fairfax Media articles and RFG announcements from December 2017 to February 2018 revealed that RFG’s franchise model was under stress, that there had been serious structural deterioration in the financial performance of several domestic franchise networks, and that the value split between franchisee and franchisor required a fundamental rebalancing. From 7 to 18 December 2017, various Fairfax media reports and RFG announcements disclosed to the market that:

• there was significant financial stress within several, if not all, of the RFG franchise networks; and
• such was the severity of the stress within the franchise networks that in June 2017, the Board had commissioned Deloitte Touche Tohmatsu to conduct a Business-Wide Review of the sustainability of the company’s franchise model and franchise network operations.

During the trading period 11 to 18 December 2017, RFG’s share price fell $1.75 (approximately 40%). On 19 December 2017, RFG disclosed to the market that its 2018 half year (1H18) net profit after tax (NPAT) would be materially lower than the prior corresponding period. In response, RFG’s share price fell a further $0.67 (approximately 25%). On 9 January 2018, RFG announced that 1H18 statutory NPAT would be less than the $22m previously forecasted on 19 December 2017. Following the announcement, the share price fell $0.15 (approximately 6%). On 2 March 2018, in its 2018 half year results, RFG disclosed a significant deterioration in the performance of its domestic franchise division, substantial asset impairments, and a proposal for 160-200 outlet closures by 2019 to address further financial deterioration for the Company. RFG was reinstated to quotation on 5 March 2018. The market reaction was immediate and visceral. By the close of trade, RFG’s share price had fallen a further $0.75 (approximately 36.5%).

Proposed Class Action

The proposed class action will allege that:

• from at least April 2017, RFG failed to disclose to the market the material financial risks associated with its franchise model and deteriorating franchise networks, and misled investors regarding the Company’s financial position and performance;
• from June 2017, RFG failed to disclose that it had appointed Deloitte Touche Tohmatsu to review the sustainability of its franchise model; and
• RFG’s August 2017 profit guidance for the 2018 financial year lacked reasonable grounds.

Class Action Registration

All current and former shareholders who acquired an interest in RFG securities during the period from 18 April 2017 to 28 February 2018 (inclusive) are invited to sign up to the proposed class action. Eligible investors may obtain an information pack by visiting https://portal.omnibridgeway.com/cases/register/rfg-investor-class-action.

Contact Us

If you would like to find out more from Phi Finney McDonald about the proposed class action, or have any queries, please contact us at classactions@phifinneymcdonald.com.

--- end of excerpt (from website - link above) ---

Disclosure:  I did not hold RFG shares, so I will not be signing up for the class action.

Further Reading:

https://www.mauriceblackburn.com.au/class-actions/past-class-actions/retail-food-group-class-action/

https://www.smh.com.au/business/companies/greedy-and-unethical-franchisees-welcome-accc-action-on-rfg-20201215-p56njy.html

The following picture is from that SMH article (titled: 'Greedy and unethical': Franchisees welcome ACCC action on RFG, link to the full article is directly above, i.e. last link) from 15th December (2020) about the ACCC action taken against RFG that has clearly provided more fuel/impetus for the current class action on behalf of former Michels Patisserie franchisees.

13-Sep-2020:  In response to @Anni8's straw on RFG Debt, you are correct in that it has been some time since I looked at RFG's debt - it was just after the November 2019 capital raise and partial debt-forgiveness.  However, their 28-Aug-20 FY20 Results Presentation says (on page 6) that their net debt was down to $33.1m (from $259.7m at 30-Jun-19), and their market cap is only $142m.  While that is a big improvement, it's still a LOT of debt for such a tiny company (now).  Furthermore, while their balance sheet shows net assets of $176.1m, I note that $238.1m of that was intangibles.  If you remove those intangibles, you're left with net assets of negative $62m, i.e. net liabilities of $62m.  In a wind-up situation, those intangibles, which are mostly brand value estimates as I understand it, would be written down considerably.  

In their Appendix 4E and Full Year Statutory Accounts, RFG said (on page 1) that their "Net Tangible Assets/(Liabilities) per security" at 30-Jun-20 was (2.9) cents, i.e. negative 2.9 cents per share.

I've had a look at note 25 of their accounts, and it does indeed state that their net debt was down to $20.8m at 30-Jun-20, which is clearly a different number to the $33.1m net debt figure they provided in their presentation, and it looks like the difference is because (according to note 4 on page 6 of their results presentation) their "Net Debt is calculated in accordance with Senior Debt Facility Agreement definition, including maximum $25 million cash offset."

You've said:

"Given the sale of Dairy Country for $19.2 million, it is probable that net debt will now be reduced to circa $1-2 million."

"I think you will agree that this level of debt is no longer life threatening for RFG and given the new direction and leadership under Peter George, I suggest we can reasonably expect survival and a much improved performance in the coming years."

Taking the second point first, I do have to agree that Peter George appears to have done a very good job of reducing RFG's debt VERY significantly, albeit mostly due to debt forgiveness (write-offs by their lenders).  However, credit where credit is due.  They are certainly in a MUCH better position now than they were 12 months ago.

Furthermore, I think my pronouncement of the death of RFG may well have been a tad premature, and you are right - they do now look to have a reasonable chance of survival, if the sale of Dairy Country for $19.2m proceeds as planned.

I do however note that while the BSA (business sale agreement) provides for a sale price of $19.23m, it is subject to net working capital adjustments, and also remains subject to a number of conditions, including FIRB approval.  Assuming it goes through, and assuming that RFG's net debt position has not deteriorated since June 30 (which is a big assumption considering the COVID situation, particularly in Victoria), then it has the potential to wipe out the majority of RFG's net debt.  However their actual debt at June 30 was $54.7m - excluding deferred borrowing costs, derivatives and financial guarantee contracts, as described in Note 19 - and their cash and bank balances was $33.9m, and in the current situation I would doubt that you could apply that cash to pay off the debt without crashing the company completely.  In other words, I expect that much of that cash would be needed to keep the company afloat at this difficult time.

To summarise - you're right, they're in better shape than I thought they were.  Agreed.  However, they still have a negative NTA (or did, at June 30), and their balance sheet is still bloated with intangibles which I believe will be subject to significant write-downs in future years, should they last that long.  And - every significant move they make, such as the Dairy Country sale, has to be approved by their lenders, as they stated in that announcement. 

I still don't see PE circling, and I believe that's because RFG is light on real tangible assets, so they still don't look too appetising to Private Equity, as there isn't much left to sell off, versus the remaining debt.  

Apart from Asset Sales (such as Dairy Country), I think the odds are that RFG's net debt position will get worse in H1 of FY21, mostly due to COVID, but also because their business and their revenue is shrinking with every asset sale, and if you keep selling assets, eventually there's nothing left.  Also, many of their brands have been damaged, some of them perhaps irreparably.  Just my opinion of course.

However, thanks for your straw Anni8, you are right, I wasn't aware of just how much RFG have managed to improve their net debt situation.  They have certainly achieved a lot in the past year, and their chances of surviving have certainly improved.

I still wouldn't be buying RFG shares though.

11-Sep-2020:  Sale of Dairy Country

Unfortunately, RFG have to shrink to survive (if they do survive, and I have NOT given them great odds of surviving - but they have certainly outlasted my own expectations by quite a margin - so far) - and that involves selling off some of their best assets. 

In this announcement, they say, “Dairy Country has represented a reliable past contributor to Group earnings, however, is no longer considered an appropriate fit with RFG’s strategic intent to focus its resources on the Company’s core retail food franchising and coffee businesses”.

“The transaction facilitates the Company’s exit from foodservice and manufacturing pursuits, providing the Group with a less complex business model that enables RFG to dedicate its resources towards driving positive outcomes for its franchisee community, and building value for its wholesale coffee business following its FY20 restructure”.

“Net proceeds from the sale will be applied to the extinguishment of Dairy Country’s working capital facility (c.$13.7m) and the further paydown of debt, freeing up future cash flows and providing RFG additional scope and capacity to respond to the unique set of challenges and evolving retail landscape attributable to COVID19 and its ongoing influence on trading conditions for the Company’s business and franchise network”.

The BSA provides for a sale price of $19.23m, subject to net working capital adjustments, and remains subject to a number of conditions, including FIRB approval. The Company’s lenders have consented to the transaction, and settlement is anticipated by October 2020.

The buyer is Fonterra Brands (Australia) who RFG Executive Chairman Peter George noted was a natural buyer for the business, as they were a key Dairy Country business partner. 

Interestingly, Peter George had 2.1 million performance rights vest on August 28th, while just 900,000 (0.9m) performance rights lapsed.  At 6.4 cents per share (where RFG closed yesterday), those 2.1m new RFG shares are worth $134,400, so it could be a nice bonus for him - if he gets to sell them before the company goes broke.  I'm obviously still very pessimistic on RFG, but I think you need to keep this sale in context, and the context is that it is only going to pay down a fraction of their remaining debt, and the more they sell, the less they own, and the lower the value of the company becomes.  The debt is what is going to kill them, in my opinion.  The debt is also the main reason why they haven't been bought out by PE (private enterprise).  That could still happen, but only if PE see value there, AFTER the debt is extinguished, and I struggle to see that possibility.  There is just too much debt.  The only reason they are still in business is because their lenders are allowing them to continue, and the only reason their lenders are allowing them to continue is because the alternative would mean crystalising massive losses (for the lenders), and they are hoping to pull the pin at a more opportune time (when they hopefully lose LESS money) - again, in my opinion.  

For the sake of the many hard-working and long-suffering franchisees - who haven't done ANYTHING wrong - I really hope RFG can survive in some form, but I still struggle to see how they will, unfortunately.

28-Aug-2020:  FY20 Results & Update   and   FY20 Results Presentation

I don't see this turnaround turning around yet, and COVID certainly hasn't done them any favours.  I remain surprised that they're still kicking, and that they've continued to be able to raise fresh capital to stay alive.  For how much longer remains to be seen.  This is a barge-pole company.  You wouldn't go near them, or touch them with a barge pole.  Very high risk.  Way too high for me.

29-May-2020:  Further COVID19 Update

Retail Food Group Limited (RFG) today announced that retail trading conditions experienced by its domestic franchise network were gradually improving as Australian governments eased certain of the measures employed to slow the spread of COVID-19.

RFG Executive Chairman Peter George noted the Group had observed that customers were starting to return to shopping centres in increased numbers as government restrictions were eased and limited scope for ‘eat-in’ service had been afforded.

“This trend was best evidenced by recent trading data(*1) for the Company’s Donut King, Gloria Jean’s and Michel’s Patisserie networks where customer count declines versus the previous corresponding period had approximately halved since a peak decline exceeding 50% during the reporting week ending 2 April 2020”, he said(*2).

“We are buoyed by the reopening of c.60 outlets which had temporarily closed due to the impact of COVID19 restrictions and are cautiously optimistic that trading conditions will continue to improve in coming weeks”.

“Increasing traction has also been observed in terms of procuring rental relief for franchisees, with concessions having been obtained in respect of c.290 outlets, predominantly in relation to April and May rental periods. In many other cases negotiations are advanced, and we anticipate that this process will be an ongoing one as the pandemic period persists and a reasonable recovery period is provided for”.

The Group’s international franchise network remained significantly impacted by COVID19 restrictions. Whilst 126 mobile units had recommenced operations within the United Kingdom and New Zealand markets, c.350 traditional outlets remain closed, a further 157 are restricted to takeout only, and the balance continue to operate normally, albeit subject to difficult trading conditions. It is anticipated that many of those outlets which have temporarily closed will start to reopen throughout June as local government restrictions ease, albeit c.20 outlet closures are considered permanent.

Mr George noted that, despite the positive developments indicated above, trading conditions remained challenging and the Company anticipated the continuation of those measures implemented by it to support its franchisee community would remain in place at least for the remainder of the financial year.

“The strategies previously advised to the market regarding the Company’s efforts to reduce its cost base, including restructure of RFG’s wholesale coffee operations which was now substantially complete, provide the Group with increased scope to further support its franchisees during these unprecedented times”, he said.

Given the ongoing uncertainty associated with COVID19 and its implications, it remains difficult to predict full year outcomes at this juncture.

*1. Based on unaudited trading data reported by franchisees for the week ending 24 May 2020, versus unaudited trading data reported by franchisees for the week ending 26 May 2019

*2. Based on unaudited trading data reported by franchisees for the week ending 5 April 2020, versus unaudited trading data reported by franchisees for the week ending 7 April 2019 

Disclosure:  I don't hold and don't like RFG.

02-April-2020:  Further COVID-19 Update

On March 25th, RFG Updated the market on the impacts of COVID-19 on their business.  Two days later they released a "Further COVID-19 Update" (on the 27th).  Five days later (yesterday) they've released another "Further COVID-19 Update" (link above).  This one is actually quite good, in that they have spent a fair bit of it explaining how they are attempting to assist their franchisees get through this.  They need to, or the franchisees will just walk away, leaving RFG with a debt load that would finish them.  RFG are also calling on the government to do more in relation to landlords refusing to reduce or waive rent.  Apparently some landlords have agreed to defer rent, which, as RFG correctly points out, would just defer the full financial impact of this for those franchisees (send them broke later instead of earlier).  As RFG says, that approach is unacceptable in these circumstances and is not in the spirit of what the government has been trying to achieve in relation to keeping such businesses viable and thereby providing tennants for those landlords when things normalise.  It's easy to be cynical with a company like RFG who have treated their franchisees so badly for so long, but they do finally appear to be trying to do the right thing.  Whether it's just because their own survival depends on it or not, it's still good to see.

27-Mar-2020:  Further COVID-19 Update

Excerpt:  RFG Executive Chairman Peter George noted the strong link between the Group’s performance and that of its franchise network, which had been impacted by rapid change within the retail market.  

“A large majority of our franchise partners are facing an extremely difficult trading environment, particularly within shopping centres, as consumers react to the increasingly onerous measures taken by government, and of course are focused on more immediate issues such as their and their family’s health and safety”.

It sounds like their Brumby's Bakery Franchises are doing OK (increased sales actually) but that everything else is struggling, as expected.

25-Mar-2020:  COVID-19 Update & Withdrawal of FY20 Guidance

Wounded, but there's still a pulse.

Some time in 2018:

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).

http://www.livewiremarkets.com/wires/day-of-the-dog-buying-banged-up-stocks

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

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.

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 Strawman.com'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.