Nightclubs have been in long term decline in the UK, much of Europe and presumably worldwide for many years as documented in this article from 2018. Within this market, Revolution Bars has underperformed, with bars closed, leases surrendered and the share price losing two thirds of its value even prior to Covid.
Catch Up
My last article here was in January 2020, but I have since covered it with Mark Simpson in Small Caps Live. To find out exactly what I and others said there, log in and search for “RBG”. For convenience here is a quick summary:
- On 26th February 2020 they reported apparently good LFLs in at H1, but this should have been aided by considerable spend on refurbs and we noted the risk of the weak balance sheet and from covid. Mysteriously though, neither were mentioned in their statement.
- By the 6th March coronavirus was however hitting the news and I described RBG as “fragile” as regretted not shorting it.
- On 18th March they got around to making a statement, saying they were suspending rent, “proactively exploring all the options available” and begging the government for help. I said they appeared to be bust without further support.
- On 14th April they announced they were seeking a bail out from their bank. This was confirmed on 26th May with an announcement subtitled “Liquidty for the forseeable future” which led to a big rally in their share price.
- Liquidity was evidently not the same as solvency and on the 5th June they said they were raising £15m from shareholders at 20p a share – a 42% discount. I said:
Now if the right of use assets are severely impaired (and they can’t get concessions from their landlords) then it might be worth counting lease liabilities as debt…In which case £15m is clearly not enough…I don’t think £15m is enough unless the come to an agreement with landlords…They don’t say in their statement what their expectations for reopening are. I think 2 months is optimistic for this kind of business where the majority of profits are made late on Friday and Saturday nights when it is rammed.”
- In their 3rd September update they didn’t give any hard financial numbers and complained that not all landlords were accepting rent cuts lying down.
- On 25th September they confirmed they were assessing “various strategic options”, including a CVA to get out of some of their commitments with landlords. With the share price at 9p, I questioned how many of the leases were still isolated from the parent and summarised as:
This is basically a failed nightclub operator that has been forced to switch to operating its venues as pubs….in the worst trading environment for pubs since the black death.
- On 9th November the trial results suggested the Pfizer vaccine worked and Revolution’s share price was among those that jumped. On November 13th the announced the concluded CVA, although it only covered 13 out of 72 sites.
- On the 4th March they announced:
The Group therefore has more than sufficient liquidity resources available to take the Company well through 17 May 2021, the date that its estate will be able to commence trading indoors in line with the Government’s phased release of current lockdown measures. This assumes no tightening of Government restrictions over that period. Previous experience has demonstrated that when the Company is able to trade without restriction, targeted for 21 June 2021 in the reopening roadmap, it is highly cash generative and profitable.
I did some sums showing liquidity would be tight on this plan and highlighted the use of the word “stakeholders”. While I felt they were delaying results pending a fundraise to support the going concern statement, they did in fact issue them on 13th April. They used the dreaded “Stakeholders” word once again and Mark led in pointing out balance sheet weakness.
Latest Fundraising
On 25th May another deeply discounted rescue fundraising was announced, again at 20p a share, but this time for £21m.
I’ve tried to put together what I think the balance sheet would look like immediately before and after the fundraise. Current ratio improves from 0.5x to 1.2x and net assets improve from -£39m to -£19m.
However the net asset calculation is actually quite simple:
- £39m deficit of lease liabilities above right of use value, despite multiple CVA and similar events
- £20m newly raised
- Everything else balances
- Net assets of £-19m.
So for RBG to now be worth zero there must be £19m worth of unaccounted for intangibles, e.g. brand recognition, know-how etc. Is that really credible? Couldn’t somebody else do better with £20m by starting again from scratch?
Furthermore, in just over a month, just in time for the year end, their current ratio is due to go back under 1.0x as their revolving credit facility becomes current. So presumably they’re hoping this will be extended. A year after that the CLBILS becomes current and a year after that they’ll be toast without further financing. But based on past performance they’ll have been through at least one more CVA and/or fundraise before then.
But it gets worse – in their fundraising document here includes this beauty:
I commented at the time that this looked like wishful thinking and opined that the roadmap had been looking less on track by the day. I expected some relaxations, but asked why would you allow a load of unvaccinated youngsters in a nightclub with zero restrictions in three and a half weeks time?
On Monday they announced that the open offer part was fully subscribed, suggesting strong demand at the 20p level, yet the market price also briefly dipped back to 20p. Later that evening the government confirmed what everyone (except Revolution, apparently) had known for weeks and that legal restrictions would not end on the 21st June.
Outlook
In common with most pubs, in the short term Revolution Bars will struggle to make money with social distancing in place. It is unclear whether they will be able to continue seven-day opening across all sites until rules are relaxed further. I suspect the main rationale for full opening on the 17th May was to ensure systems and staff were up to speed for the 21st June, but furlough now once again looks the more economic option.
The 19th July is now given as the new date for the end to social distancing, but this is in the same statement that makes it clear that few of Revolution’s target market will be vaccine protected at that point. Given that vaccines are not 100% effective, having very large infection levels in the young still presents an unacceptable danger to the at-risk vaccinated. Ultimately I do expect some relaxations on the 19th July, but the one thing we know with certainty is that traditional nightclubs will be the absolute last thing to return.
In the medium term Revolution should benefit from a relatively well invested estate and their shareholders’ willingness to repeatedly throw money into a bottomless pit means that they have survived when many competitors have not. Flexibility forced on them over the last 18 months should make them more entrepreneurial and customers undoubtedly have money to spend. But barring a major reversal in cultural trends I expect success to be shortlived before the underlying issues reassert themselves.
This is an underperforming operator, encumbered with legacy lease and loan liabilities, operating in a declining market. The outlook is not good.
LeoInvestorUK's blog 