McColl’s Retail (LON: MCLS) shares are down again to only 0.85 pence as the company reveals yet more problems with its situation. The problem, again, revolves around the capital structure of the group. This is what has been devilling it for months now and the problem is, as problems go, that it’s a very difficult one to solve. Well, difficult to solve while also preserving value for current shareholders, that is.
As we’ve discussed about McColl’s before, there’s a significant worry that there is any value left in the group. This is not because the operating management of the group has gone awry – it’s more events, dear boy, events, as Macmillan pointed out. More retail trade is taking place online, lockdowns didn’t help the passing trade that is the lifeblood of the group, and so on and on. A series of events.
Management has looked at how this could be turned around, and they’ve even found something that appears to work. Rebranding as a local version of Morrison’s – and in conjunction with that group, of course – does seem to increase sales per square foot. So too margins, and that’s the long-term future of any retail group.
The problem is not, therefore, that there’s no operating strategy. It’s that the capital structure of the group just isn’t sufficient to carry the work through of this or any other such plan.
This is why McColl’s CEO jumped ship perhaps that 6 weeks back. Making very few friends indeed by dumping his shares as he exited.
It’s this which is leading to the likely suspension of the shares in a month’s time, on that 1 June. As today’s announcement points out, the immediate reason is an entirely technical one. The accounts for the year ended 28 Nov 2021 need to be delivered by the end of May 2022. If they’re not then McColl’s will not be meeting the listing standards. As the accounts are likely to be delayed then better to get that announcement of not meeting listing standards out of the way early – like today.
But the problem with the accounts is not that they don’t know how many chocco bars they’ve sold. Instead, it’s that problem with the capital structure of the group. The auditors need to sign off on the idea that McColl’s is a going concern. That it can continue to trade, pay its bills as they come due, meet loan commitments, and so on. And without sorting out that capital structure the accountants aren’t going to do that.
So, the shares will be suspended unless there is a solution to that capital structure. The problem here being that no one really knows what a good solution would be. Creditors aren’t going to write off loans if the shareholders are going to be left with anything very much. There have been some inquiries about making a bid for the group but they all seem to be likely to leave at least some creditors and most equity high and dry.
Or, as we might put it, there is no elegant nor even obvious solution here which makes the equity worth anything very much. There’s the possibility of taking a punt and hoping for a Hail Mary pass and at some price that’s reasonable. But whether the McColl’s share price is low enough yet for that is a difficult calculation.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.