All eyes are on SFI

As the vultures circle above, Mark Stretton examines the state of troubled SFI.

As Gerry Martin of Old Monk can probably testify, there will always be other pub companies ready to step in and pick up the pieces of a collapsed business.

Earlier this week, as SFI entered emergency talks with its banks, the vultures were already said to be circling. Rumours were rife that other operators were waiting in the wings for the assets, with Slug & Lettuce being the most attractive. It was suggested in the national press that two parties had already approached the Woking-based operator.

The Luminar name was on everybody's lips but an approach, at any stage, would be surprising. Luminar chief executive Steve Thomas has said he wants no more than 50 feeder bars for his 300-strong nightclub business. At the moment he has 19, including eight Orange Houses and a handful of The bars.

A deal with SFI would significantly reduce the average trading area of the Luminar estate. The company is focused on large-scale sites, between 8,000 to 20,000sq ft, with late licences. Even some of SFI's largest units, such as its Bar Med outlets, are typically 4,000 to 4,500sq ft.

Such a deal would be regarded as a dilution of focus and the share price would suffer.

Other companies linked with SFI include Regent Inns, JD Wetherspoon and Yates Group. Regent would probably be prevented by its high gearing, Wetherspoon is more likely to cherry-pick a small number of sites and Yates hasn't got the cash - a merger could be viable but is perhaps less than compelling.

SFI last week rubbished the takeover rumours, as did several analysts. "I think a takeover is highly unlikely," said one. "SFI management is going to have to trade itself out of this one."

Let's hope they do. Few will benefit from seeing another business fall into the clutches of administrators. The woes of SFI, added to the capitulation of Old Monk, have already dragged the whole sector down and every public rival should be hoping that this business will come through what is an extremely testing time. If it doesn't, it will be detrimental to the whole sector.

But this is a business that last year generated £33m in cash. For 180 bars that would seem pretty good.

In the same 12 months it spent £43m on acquisitions and developments.

The answer, then, seems simple - shut down expansion and the problems go away.

Clearly, the management also needs to bed down the existing business, dispose of non-core assets and arrest the disappointing like-for-like sales figures that led to the profits warning two weeks ago.

SFI has also recently sold £5.2m of non-core assets and is in discussions over more disposals that will bring a further £2m.

Lap-dancing chain For Your Eyes Only is still for sale but the company has yet to find a buyer at an appropriate price.Hopefully, the banks will not force the company into a fire-sale - any fool can give FYEO away but it is a cash generative business and SFI needs cash. As a non-core asset it will go in time.

The management at SFI would probably be the first to admit it has made mistakes and the challenges facing Andrew Latham and Tim Andrews are unenviable.

But both should have a chance to repair the damage. A larger question mark hangs over Tony Hill, the Jersey-based non-executive chairman due to retire next year (see panel below). There is also the issue of perception over reality. SFI is not the first business that will have problems paying its bills but, unlike others, the issue has become public knowledge and now its consortium of banks, led by Barclays, are nervous.

The banks wield the power and the company seems to have been given to the New Year to get its house in order.

Operationally, this is a good business and hopefully it will one day have the financial controls to match. The whole sector should hope it can step back from the abyss.

Tony Hill, the founding father​

The chairman and founder of SFI, has in the past been accused of almost gearing the company to death. Tony Hill's statement, made at the end of July and entered in the annual report, did not give any clue of what news lay ahead for investors.

"SFI has now achieved 11 years of continuous growth, with pre-tax profits having increased in that period from just £18,745 to over £20m. In another successful year, the company's key performance indicators are all positive. I am particularly pleased that the strong growth in sales is reflected in similar earnings per share of 24 per cent."

Due to retire next year, some observers in the industry have questioned whether SFI's chairman should go now. "The statement does not really suggest he has a handle on the business. Did it really go that badly wrong within three months? I think the company has outgrown him and now SFI desperately needs a chairman with a respected reputation in the City," said one.

The founder of Surrey Free Inns, who last year sold close to £1m of shares, has seen his pay double in the last two years. Last year he collected a total package of £460,000 despite stepping down in April to non-executive.

"He has moved further away from the business but taken more money out," said one analyst.

He has also overseen lots of management changes including three finance directors in little more than a year. As the industry is now witnessing, the company is paying the price for not having the financial controls in place to accompany its rapid growth.

Intensive care​

A cash crisis has gripped the operator of Bar Med, Litten Tree and Slug & Lettuce - SFI is suffering from an accounting term known as "over-trading".

The company has grown too fast - it has opened too many sites too quickly and now the amount of cash coming in is less than the huge costs going out.

As a result SFI has cancelled its dividend and slashed openings. The company has breached its banking covenants of £135m and warned that profits will be below expectations.

The analysts​

Douglas Jack was subsequently lauded by The Financial Times for issuing the note that asked if SFI was paying its bills. The analyst from WestLB Panmure says he was merely doing his job. That he was held up as a hero is indicative of the perception of analysts, who are all too often seen as glorified salesmen of stocks.

The only one who seemed to agree was Nigel Popham who, at the time of Mr Jack's note, said: "SFI hasn't managed its finances particularly well or, given its rapid rate of expansion, the financial base wasn't as strong as it might have been."

Greg Feehely of Old Mutual said the stock market reaction to the note was completely without foundation and Paul Hickman from house broker Peel Hunt said the "market reaction to a malicious attack had been overdone". That was when the shares dropped from 137p to 84p a month ago. Last week, after a profits warning, they stood at 30p.