Abu Dhabi, UAETuesday 21 May 2019

Chairman eats his words as Patisserie Valerie chain collapses

Small bohemian hangout taken over by the guru of small-business expansion

A Patisserie Valerie shop, which was opened by a Belgium born Madame Valerie in 1926. Getty.
A Patisserie Valerie shop, which was opened by a Belgium born Madame Valerie in 1926. Getty.

Patisserie Valerie began as a single boutique shop on the bustling streets of Soho in central London in 1926 but would soon become the bright star for the multimillionaire serial entrepreneur Luke Johnson.

When he bought a controlling stake in 2006 he had already “significant experience” in growing food and drink companies such as Pizza Express and Strada. And grow the company certainly did.

Building on its illustrious Soho reputation the patisserie already had expanded to eight stores when Mr Johnson came on the scene. Patisserie Valerie’s delicately prepared, indulgent cakes spread across the UK to the high streets of the country. Now numbering nearly 200 outlets and several brands including Baker and Spice, which has branches in the UAE, the collapse of “Pat-Val” has come as shock.

Opened by Belgian-born Madame Valerie in 1926, the ambition for Patisserie Valerie to “introduce fine continental patisserie to the English”. The company has a history of dealing with upheaval - during the Second World War the shop on the original site in Soho was razed to the ground by German bombers.

The chain’s parent company, Patisserie Holdings plc, announced it would go into administration late Tuesday after months of fraud investigations. In October 2018, a £40 million blackhole was discovered amid financial irregularities. Finance director Chris Marsh was arrested when £30 million previously declared on accounts were found not to exist and £9.8 million in debt was unearthed through two overdrafts that had not received permission.

It emerged last week the damage was far great that thought as a result “very significant manipulation of the balance sheet and profit and loss accounts.”

Thousands of false entries were found in the company’s books with revenue and profits downgraded significantly.

“As a direct result of the significant fraud referred to in previous announcements, (the company) has been unable to renew its bank facilities, and therefore regrettably the business does not have sufficient funding to meet its liabilities as they fall due,” Patisserie Holdings said on Tuesday.

For a measure of how dramatic its reversal of fortunes have been Mr Johnson, who is the son of prominent magazine editor Paul, was writing as recently as September 2018 an “aide-memoire” to businessmen “looking to spot the next fraud”.

One of the 12 points was to: “Make it complicated: most people do not understand the technicalities of investing or accounting. Many con artists fool investors by making the apparent complexities of their scheme so esoteric that no one can see the fraud.”

Clearly Mr Johnson, nor his auditors Grant Thornton, had any inclincing of the alleged activities that are being blamed for sinking his own business.

In an unpublished column from October, he had also written about what to do if business partners disagreed for a multitude of reasons. “It might be over strategy, or relative contributions, or whether to sell out.”

The patisserie’s downfall has also turned up the spotlight of auditors, their industry and shortcomings. The UK’s Business, Energy and Industrial Strategy Committee (BEIS) has recently begun an enquiry into role of accountancy firms – the review is focused on improving quality and competition in the audit market and reducing conflicts of interests sparked by the fall of companies such as Carillion and homeware giant BHS.

Grant Thornton, who were previously charged with overseeing Patisserie Valerie, are currently being investigated by the UK’s accountant’s regulators over their inability to find thousands of company inaccuracies.

“The extraordinary black-hole in Patisserie Valerie’s accounts which has led to this administration raises grave corporate governance concerns and poses serious questions regarding the effectiveness of the auditor and the current arrangements for regulation,” said Labour MP Rachel Reeves, who chairs the UK’s BEIS Committee.

“In today’s environment of regulation and scrutiny, it’s shocking that a fraud of this scale can take place within a listed company,” said Laith Khalaf, senior analyst at Hargreaves Lansdown.

“Investing in smaller companies clearly comes with risks attached. However it’s one thing to see a company’s shares wiped out by poor trading conditions, or even bad management decisions, it’s quite another to see your investment disappear as a result of fraudulent activity,” he added.

Patisserie Valerie’s final plea would fall on death ears. It had begged HSBC and Barclays to extend a £9.7 million loan deal, which expired on Friday, after the impact of the fraud was revealed to be far more damaging that previously thought.

Despite intensive efforts to rescue the business, on Tuesday it announced its administration.

KPMG have been appointed as administrators, 70 shops are to close immediately, and some 3,000 jobs are at risk and Mr Johnson has “personally” extended an £3 million unsecured, interest-free loan to ensure January salaries are paid. Mrs Reeves said she hoped “the administrators will make every effort to safeguard jobs and protect the interests of suppliers.”

The outlook, however, for shareholders is bleak. “Any dim hope investors had of recovering any value from shares they bought in good faith has now been extinguished,” said Mr Khalaf from Hargreaves Lansdown.

Updated: January 23, 2019 05:55 PM