Debatable beauty

BEAUTY products and services specialist Skinwell - formerly known as Placecol Holdings - is in the process of touching up its balance sheet with a R7m claw-back offer.

On the face of it, R7m is not exactly a substantial sum to be pumping into a loss-making business that has an annual turnover of more than R100m. But it's a costly and desperate exercise nonetheless, with expenses relating to the rights offer coming in at R1.1m and the offer price discounting the last traded share price by half.

Officially, the proceeds from the offer will cover for a "continued delay in payments" from banks as regards Skinwell's disposal of company-owned stores to new franchisees.

This unspecified "delay" has seen a deterioration of Skinwell's short-term cash position - which at the year to end-February had already flipped into a small overdraft position.

This should not be terribly surprising. In the two years since listing Skinwell has been cash flow negative, which is rather strange considering the group's shift towards a franchise model. Other listed franchise groups like Spur Corporation and Taste Holdings always appear awash with cash flows.

With trade and receivables (R22.5m) propping up Skinwell's balance sheet for the 2009 financial year, there appears to be an inability to collect on invoices to major clients (certain fashion retailers, I would guess) that account for a chunk of beauty product sales.

Great opportunity or death knell?

Naturally, a clearer picture of Skinwell's working capital requirements would be available at the end of the interim period to end-August.

But it seems circumstances dictate a more immediate mulling of the merits of a capital injection by Skinwell shareholders - which might say something about current trading conditions for the company.

How the claw-back offer works is that Skinwell shareholders will be allowed to subscribe for 140 new shares at 5c/share for every 100 shares already held.

The offer price is pitched at a 50% discount to the last ruling price for Skinwell on the JSE, which shareholders might - depending on their mood for the market - interpret as a wonderful opportunity or a death knell.

In the meantime, to ensure there is no cash flow squeeze certain Skinwell directors (Messrs De Wet, Rudolph and Grobbelaar) as well as Vunani Corporate Finance executives (Esna Colyn and Wessel van der Merwe) will advance R7m to Skinwell.

These Skinwell directors and Vunani executives - who must be reimbursed for the kind advance - will then be allowed to subscribe for any rights offer shares not "clawed back" by existing Skinwell shareholders.

Earlier misgivings

The major implication of the fund-raising exercise is that while a relatively small amount of capital is being raised, the number of Skinwell shares being issued for cash (a whopping 138 million) will more than double the number of shares the company has in issue.

In other words, Skinwell shareholders that don't participate in the claw-back offer are going to see their interests in the company heavily diluted.

Just as a point of reference, the old Placecol group offered 40 million shares at an average price of 80c/share when it listed on the AltX in 2007. At that time Placecol was forecasting earnings of R16m or 13c/share for the year to end-February 2009 - something we know never came close to materialising.

I expressed initial misgivings around Placecol in mid-2008, fretting about the fact that Placecol fell well short of its predicted trading margins in the year to end-February 2008.

At that point I argued that gross and net trading margins of 69% and 11.4% respectively probably meant Placecol would not achieve its gross and net profit targets of R112m and R16.6m for the 2009 financial year.

That column was written before the start of the global financial crisis and the marked slowdown in consumer spending in SA.

If Placecol under-performed in the good times, what chance does the new-look Skinwell - even with a slightly reinforced balance sheet - have of trading comfortably through the tougher times?

The results of the claw-back offer will be fascinating to gauge. My gut feel is that the Skinwell directors and Vunani directors are going to get their 5c worth.

- Fin24.com