Why is Goldshield’s buyer warning that it got a bargain?
Profits warnings are common during recessions but the oddest seen so far comes from Goldshield Group. The new owner has looked at the books and said that for several years the pills company’s profits may have been understated. Yes, understated.
If HgCapital, the private-equity company that purchased Goldshield, had found the profits to be overstated it might be admitting it had paid too much. It might be warning its own investors to expect a cut in their asset values. It might be consulting with lawyers to find someone to blame.
But in issuing a warning that profits may have been understated Hg is presumably telling us it got even more of a bargain than it expected when it backed the £179m buyout.
The deal was completed on 29 December 2009. A month earlier Goldshield’s then chairman, former government drugs czar and ex-police chief constable Keith Hellawell, issued accounts showing pre-tax profits up 56 per cent for the half-year to September on sales 7.4 per cent higher.
“I am pleased to report half-year profits are in line with expectations,” he said, crediting changes in systems and management efficiency and effectiveness.
But Hellawell gave his own profits warning: “It is highly unlikely to continue to have the same level of impact on the bottom line in years to come”. Goldshield spent 2009 coping with bids by its former chief executive and Hg and the chairman blamed those distractions when reporting: “To continue on an upward path of sales and profit growth we need to invest in new products. I am disappointed to report that we have failed to do so during the period under review.”
You can admire his honesty but you have to wonder what the new owner has found to make it admit that during a normal review of accounting systems “Hg discovered evidence suggesting that Goldshield may have understated its reported profits over a number of years.”
The statement of directors’ responsibilities signed by the old board on 27 November said the financial position and profits gave a true and fair view and although the interim figures were unaudited, auditors Grant Thornton reviewed the figures and found them satisfactory.
Goldshield is probably remembered for a long-running price-fixing inquiry by the Serious Fraud Office that came to nothing. There is no suggestion that is in anyway related to Hg’s warning.
Perhaps Hg is worried that discovering extra profits could mean paying extra tax but more must be said. If profits had been overstated there would be inquiries and potential recriminations: just because they were understated, the discrepancy should not be buried.
