Long-term shareholders of ASX health foods company Freedom Foods Group Ltd (ASX: FNP) received a rude shock last month. The embattled company’s shares resumed trading in late March after a months’ long hiatus triggered by the resignation of former managing director and CEO Rory Macleod in June of last year.
Unfortunately for investors, the Freedom Foods share price opened around 90% below the price it was fetching back in June when shares were originally suspended.
Why did the Freedom Foods share price plummet?
You may have missed it in amongst all the COVID-related news over the last 12 months, but 2020 was not a good year for Freedom Foods. And not just because of the business headwinds created by the pandemic.
In June, Freedom Foods announced it had been forced to write off $60 million worth of inventory. This included obsolete and out-of-date stock dating back as far as 2017. Not only that, but the company was also forced to raise significant doubtful debts provisions, as well as reverse some revenue already recognised in prior periods.
The total impact of these adjustments on FY20 earnings before interest, tax, depreciation and amortisation (EBITDA) was a negative adjustment of $10 million (this was in addition to $4 million worth of doubtful debt provisions that had already been raised earlier in the year).
At the same time, the company announced it was seeking to suspend trading in Freedom Foods shares pending further investigation into its financial position. And then, less than a week later, it was announced that company CEO Rory Macleod – who had been on leave – had resigned.
The Freedom Foods share price suspension went on, and on, and on. In the meantime, a number of class actions were launched against the company and it also got itself into a nasty dispute with one of its suppliers, US-based Blue Diamond Growers. It also sold off its cereal and snack assets to the Arnott’s Group for $20 million in cash.
For its part, Freedom Foods has ploughed on with an extensive recapitalisation plan and board management shakeup. The company is raising up to $265 million in new capital, comprising $130 million of convertible notes to wholesale investors, and a further $200 million from its majority shareholder, investment company Arrovest.
In addition, senior lenders National Australia Bank Ltd (ASX: NAB) and HSBC will provide further funding through a number of debt facilities, the size of which will depend on the exact amount of proceeds raised through the company’s other capital raising initiatives.
In the midst of all this other activity, Freedom Foods released its first-half FY21 results. The company reported a 15% jump in revenues from continuing operations (versus its restated first-half FY20 result) to $291.4 million, while total revenues came in at $317.3 million. Adjusted EBITDA from continuing operations came in at $21.7 million, an increase of $48.2 million over its restated first-half FY20 earnings loss of $26.5 million.
New CEO Michael Perich commented on the result, stating that “while there remains a lot of work to be done to ensure Freedom Foods Group can meet its full potential”, the recapitalisation plan will give the company the capital structure that will allow it to “continue to focus on delivering on [its] turnaround strategy and restore the Group to sustainable and long-term profitable growth.”
Investors will be hoping that this translates to a recovery in the Freedom Foods share price, which is now down 90% over the last 12 months. At the time of writing, the company’s shares are also trading 4.26% lower at 45 cents so far during Monday’s session.
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Rhys Brock owns shares of Freedom Foods Group Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends HSBC Holdings. The Motley Fool Australia has recommended Freedom Foods Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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