Godfreys recommends purchase offer amid default risk

Godfreys-WyndamThe Board of struggling vacuum specialist Godfreys has recommended that shareholders accept a 32 cent per share bid for the business that could see it taken private by 99-year-old co-founder and major lender John Johnston.

The announcement comes with an admission that the business may default on its loans by the end of the year after likely breaching two of its lending covenants through Arcade Finance, which is associated with Johnston.

“Given its current trading performance, Godfreys currently believes it will be difficult to satisfy the facility agreement’s covenant requirements as at 28 December 2018,” the company said on Wednesday. “Failure to do so would constitute an event of default.”

Godfreys was forced to downgrade its full year earnings guidance by 36 per cent on Wednesday after trading deteriorated further in the two weeks since its last update on 23 April.

Earnings before interest, tax, depreciation and amortisation (EBITDA) is now expected to be $3.5 million after like-for-like sales declined by 27 per cent over the last fortnight, bringing year-to-date LFLs down to negative 7.8 per cent.

Recent negative trading was attributed to changes made to television advertising, part of  a plan designed to reduce reliance on discounting by focusing more on product features and benefits that did not resonate with shoppers.

In a letter to shareholders sent out on Wednesday Godfreys’ chairman Brenden Fleiter said the board considered the offer levied by Johnston’s Arcade Finance against its ability to meet its current financing obligations or obtain alternative funding to continue operating.

“While good progress has been made in delivering operational efficiencies and progressing those key areas identified requiring further investment, there is no guarantee as to the benefits that the turnaround strategy will realise, nor the time required to realise these benefits,” he said.

“Current retail environment and trading conditions also remain challenging which is expected to make it difficult for Godfreys to meet its obligations under its current financing arrangements.”

An independent report into the deal also recommended that shareholders take the offer.

Godfreys said it will likely breach both its leverage ratio covenant and its fixed cover charge ratio covenant under its facility agreement with Johnston’s financing arm Arcade Finance by 29 June, but has been granted waivers on both accounts on the condition that it enters into negotiations about paying down debt.

Arcade Finance already approved a waiver on one of Godfreys covenants in April, at the time saying there would be no further relief provided, but it appears to have back tracked on that, granting a waiver for the second covenant.

Debt negotiations with Arcade are slated to begin next week, 11 May.

The Arcade Offer will close at 7PM Adelaide time on 24 May.

More to come.

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