October 12, 2018 / 11:57 AM / in 5 days

Breakingviews - Patisserie Valerie fate rests on accounts’ hot air

LONDON (Reuters Breakingviews) - Patisserie Valerie needs to find the cause of its sour dough – and fast. The cream cake chain will go under without fresh cash, and it revealed on Friday its Chief Financial Officer Chris Marsh had been arrested. The crucial issue affecting its chances of new investment is whether the group’s recent impressive operating performance contains the same level of hot air as its freshly baked eclairs.

Women walk past a branch of Patisserie Valerie in London, Britain, October 10, 2018

Missing a winding-up order from the tax man is never a good sign. Luke Johnson, chairman of Patisserie Valerie parent Patisserie Holdings, had not been aware that Her Majesty’s Revenue & Customs was seeking to close down the company due to an unpaid 1.14 million pound tax bill – despite the fact that the notice had been made public five days earlier. Patisserie Holdings shares were suspended on Wednesday amid “potentially fraudulent” accounting irregularities. Marsh has been suspended, arrested and bailed.  

On the surface, Patisserie Holdings looks like a simple, profitable business. As of March this year it held nearly 30 million pounds of net cash, no debt on its 109 million pound balance sheet and revenue growth over 9 percent year-on-year in the previous six months. If this snapshot is to be believed, the current mess should be relatively simple to clean up. Even if someone has pinched the cash, Johnson, a lauded entrepreneur, needs to inject some more, settle the tax bill, pay suppliers and 2,500 staff and watch the company recover again. That should leave only a modest dent in his net worth, estimated by the latest Sunday Times Rich List to be 260 million pounds.

A rescue will be more complicated if the actual operating performance, which saw annual revenue almost double in the four years to September 2017, has been inflated. In its latest assessment Grant Thornton, the company’s auditor, highlighted revenue recognition as one of the most significant assessed risks of “material misstatement” – although it added that it had not identified any “material deficiencies”. The extent to which this represents the full picture is the extent to which Johnson – or any other investor – will be prepared to supply more dough.

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