Chrysalis vindicated for ditching Revolution Beauty at hefty discount?

Shares in the firm were suspended in September, with the trust selling out at a 90% loss in November


Chrysalis Investments raised a few eyebrows in November after opting to sell its entire stake in troubled make-up company Revolution Beauty having only bought into the company in July 2021. The move saw investors take a 90% haircut, recouping just £5m of the initial £45m investment.

The beauty company’s shares were suspended from trading at the beginning of September 2022 following a failure to publish its audited FY22 results.

An independent investigation into the company was ordered that same month. The final results, published on 13 January, revealed a series of questionable business deals, undisclosed loans and unnecessary stockpiling of inventory.

Inflated value of acquired firm

The investigation was recommended by the company’s auditor BDO and carried out by Macfarlanes and Financial Risk Alliance (FRA). Among the concerns highlighted was Revolution’s acquisition of Medichem Manufacturing, a company that was wholly owned by Revolution’s current executive chairman and co-founder Tom Allsworth.

Medichem acquired several products from third parties during 2020 and 2021, selling them on to Revolution at a markup, which saw Medichem net roughly £700,000 in profit.

Revolution had previously acquired some of these products directly from the relevant third parties, according to the report.

In addition, sales of Medichem products fell between April and September 2021, but Revolution continued to purchase similar volumes in this period, resulting in increased stock holdings of Medichem products at Revolution.

The acquisition completed in October 2021, during which month sales from Medichem to Revolution decreased.

The total consideration for Medichem came to £26m, of which £6m was paid on completion, with the remainder still outstanding. The report added that the independent authors of Medichem’s valuation report did not consider whether these sales should have any impact on its fair value.

A separate independent valuation of Medichem has been launched, and is ongoing.

Distribution partnership agreements

BDO also raised concerns about sales made by Revolution to three key distributors in February 2022, specifically regarding the volumes, timings and terms of the sales, as well as their rationale.

In February 2022, the final month of Revolution’s financial year, sales to the unnamed distributors accounted for an abnormally high proportion of the year’s orders from those particular companies.

The report stated that each of the stock orders included products available within Revolution Beauty’s inventory at the time, rather than products that the distributors themselves had actually ordered.

The report added: “Following challenge by BDO as to the non-settlement of the invoices raised in relation to these sales, which remained outstanding at the time of the audit, [Revolution Beauty] took steps to agree payment plans with the distributors with payment dates significantly later than the usual payment terms, in one case agreeing that most cash would be received after February 2023.”

What is more, from July 2021, two members of Revolution’s board, co-founder and former CEO Adam Minto alongside Allsworth, made an aggregate £1m of personal loans or other investments to one of the distributors and, in January 2022, Minto made a further loan of £0.3m, this time to the owners of another of the distributors.

The report added that none of these arrangements were disclosed to the board at the relevant time, with the current board calling them “unacceptable business practices”.

Amending the full year results

The investigation concluded that these sales were only undertaken for the purposes of meeting sales targets for FY22, and that the distributors had ordered the relevant products following a request from Revolution’s management. For doing so, the distributors obtained advantageous and non-standard payment terms.

The £9m of revenues resulting from these orders will now not be recognised in the company’s 2022 results, and the inventory and provisioning calculations for the year will also be revised accordingly.

Minto has since resigned from the board, and Allsworth has stepped back from day-to-day involvement in the business.

Revolution CEO Bob Holt acknowledged the investigation had unearthed several serious issues with the running of the business under the previous senior management team, but said he had no doubt that the fundamentals of the business remained strong.

The audit of Revolution’s FY22 is ongoing, and it is expected the adjustments will have a material impact on the anticipated £22m of adjusted Ebitda profitability that was announced in the May 2022 trading update.

An update on the date of publication of Revolution’s FY22 accounts will be provided at the earliest opportunity, according to the company.

Portfolio Adviser approached Chrysalis to find out their views on the investigation’s final report, but no response was received.

Over the last 12 months, the trust’s share price has fallen by 60% to 84p, and with NAV estimated to be 148p by Hargreaves Lansdown, it now trades at a discount of 47%.

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