Luke Johnson, chairman of Patisserie Holdings Plc, needs to unveil his showstopper.

The company said Thursday that it would cease trading without an immediate injection of capital, after reporting the previous day it had been notified of significant accounting irregularities. 

There are scant details of what has gone on at the cake maker and café chain. As my colleague Chris Bryant pointed out, the accounts were pretty plain vanilla, and the company said it had net cash of 28.8 million pounds ($38.1 million) as of March 31. So it’s remarkable that it could so quickly find itself on the brink of collapse.

But there is a way for the mess to be cleaned up: Johnson, who owns 37 percent of the shares, could stump up some funds.

Analysts at Langton Capital say that about 35 million pounds would be needed to pay suppliers, taxes, and make up any cash shortfall. 

Johnson could, for example, commit to buying shares in a rights issue for that amount, with other investors joining in if they wanted to. The company says it is considering all options.


This would prevent a collapse that would likely wipe out the equity. Johnson, a serial entrepreneur, will surely want to raise money for other ventures in the future, and this approach would keep the capital markets onside.

If he can’t scrape together new funds – or if he’s unable or unwilling to put in enough of his own cash – he could buy the business after it had gone into administration. Though this would be cheaper for him, and could save jobs, it would be much less palatable for equity investors. Shareholders and suppliers would largely lose out. If he combined this with some general tidying up of the chain’s real estate – which is sensible anyway, given the woes facing British retailers – landlords could also suffer.

As I have argued, Patisserie Valerie is more exposed to a consumer downturn than Greggs Plc, which offers value-for-money options such as cheap coffee and jammy heart biscuits, rather than its rival’s extravagant creations.

But it has a strong brand and some decent locations. And retailers, such as department store chain Debenhams Plc, are increasingly looking to fill space in their outlets with catering. That offers cafes and restaurants an opportunity to expand without saddling themselves with expensive real estate.

The company does have to move quickly, though.


Suppliers may well ask to be paid upfront, adding to the pressures on working capital. And there will likely be a loss of customers as people place their orders for celebration cakes elsewhere. 

If Johnson does go down the rights-issue route, he will have to work hard to convince investors that the company has got to the bottom of its accounting problem – and that the business has a long-term future. Conviviality Plc, owner of the Bargain Booze chain, appointed administrators in April after failing to raise the full 125 million pounds from investors that it needed to recapitalize the business.

For Patisserie Valerie to avoid the same fate, the head chef needs to get into the kitchen – and fast.

--With assistance from Chris Bryant.

To contact the author of this story: Andrea Felsted at afelsted@bloomberg.net

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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