Slippery side to Cobra “pre-pack” deal

The recent purchase of Cobra, the “Indian” beer brand with debts put at £75m, by Molson Coors has raised eyebrows about the process of  “pre-pack” administration.

Molson Coors paid £14m for a 50.1% stake in a new company, Cobra Beer Partnership, which took over the failed enterprise on the same day as it was placed into administration. The announcements were simultaneous.

Lord Bilimoria, the founder and majority shareholder of the collapsed company, holds 49.9% of the new venture, of which he is chairman.

It is widely known that Bilimoria has been seeking to raise additional capital for the original business by wooing potential partners, including Diageo, but none were interested. He had also been seeking to negotiate a Company Voluntary Arrangement with creditors under which Cobra would have met a proportion of its liabilities and continued trading, but that fell through.

The Cobra brand was launched in the 1980s and became ubiquitous in Indian restaurants, but it has yet to be profitable. In the year to July 2007 it lost £13m. Last year its UK sales were £28m, 40% of which went via restaurants and a third through supermarkets. An Indian offshoot, which is unaffected by the UK deal and remains controlled by Bilimoria, had sales of about £5m and accounts for 1% of India’s beer market.

Analysts suggest that Molson Coors has got a bargain because it will be able to take up some excess brewing capacity to produce Cobra at he same time as successfully pushing the brand through its extensive trade network, something that Cobra has lacked. But the question unsecured creditors are asking is why Bilimoria has a stake in a potentially very profitable new business and remains involved in its management while they are so massively out pocket.

If the brand had been put up for auction rather than sold immediately by the administrator, might they have recouped some of their losses? Nobody knows for sure but the most plausible reason for Bilimoria’s continued involvement is that Molson Coors wants him to give the brand a high profile as well as links to the venture in India. 

Similar questions have been asked about other “pre-packs”, which have been permitted for about five years but which have only come to prominence since the recession took hold. The concept is that jobs are saved by allowing directors of a troubled company to put it into administration with an agreed purchaser waiting to buy it immediately free of debts. Critics say that takes no account of potential job losses in creditor companies.

They also speculate that there is an untested legal grey area as to when directors know their company is trading insolvently. On the other hand, by remaining involved with a phoenix and debt-free venture, they may bring expertise to the new enterprise despite losing their equity in the original company.

A recent illustration of how pre-pack administrations can leave creditors out of pocket came when HBJ Wines (Hayman Barwell and Jones), one of the largest wine wholesalers in London, went into pre-pack administration back in January and was bought from the administrator by Coe of Ilford on the same day.

The administrator has still to finally quantify the failed company’s liabilities, but trade estimates put them at about £500,000 and creditors say that they have been warned that the most they are likely to recoup is 30p in the pound.

Finance on Friday, 05.06.2009