Crisis at Torex Retail

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Torex Retail’s board of directors was warned that its bankers would “not welcome any change” to the management team of the retail software developer two days before its profit warning and share suspension last week.

A letter, a copy of which has been seen by the Financial Times, was sent to Torex Retail’s chairman and board of directors following a presentation to bankers on January 24 by Marcus Leek, Torex’s finance director, and Neil Mitchell, the chief executive who was suspended this week.

According to the letter, Mr Leek and Mr Mitchell used the meeting to warn the company’s bankers that there was “a prospect” that it would be issuing a profit warning and would be in breach of “at least one of the financial covenants” in its loan.

Two days later, Torex Retail issued its profit warning, triggering investigations by the Serious Fraud Office and the London Stock Exchange. This was followed this week by Chris Moore agreeing to step down as Torex’s non-executive chairman and Mr Mitchell being suspended as chief executive.

In recent months, analysts have expressed concerns that Torex Retail’s balance sheet might be overstretched. Since listing on Aim in 2004, the company has spent £400m buying competitors in the retail point-of-sale systems market.

Though the company had previously estimated its debts at the end of the year would be £180m, it warned last week that borrowings would be £23m higher than expected.

In the letter, Torex Retail’s bankers indicated they would not support Mr Moore returning to the dual role of chairman and chief executive, a position he held until September last year when Mr Mitchell was appointed chief executive.

The bankers warned the board not to tell shareholders it had the support of the banking syndicate. “Any statement can only go so far as to say that the Company is ‘in discussion with its bankers’,” the letter said.

The letter demanded an immediate review of the company’s financial position by independent accountants and evidence of the status of contract negotiations with McDonald’s, the fast-food chain that is one of Torex Retail’s largest clients. The syndicate also warned it would not support any restructuring plan before it had reviewed Torex Retail’s finances.

The speed of the meltdown has caught even the most cynical technology analysts by surprise. Within two weeks of an upbeat trading statement being issued on 18 January, the Oxfordshire-based company has suspended its shares, launched an investigation into its accounts, and lost its controversial chairman and recently appointed chief executive in a boardroom battle that has observers scratching their heads.

Meanwhile, the London Stock Exchange, the Financial Services Authority and the Serious Fraud Office have launched separate enquiries into Torex. Not only does that underline the gravity of the situation, it raises the possibility of criminal activity and possible prosecution of company executives.

The FSA will look into whether the company and its executives have been involved in any market abuse, such as misleading the market or irregular share trading. The company's upbeat statements in the months before the shock profit warning are likely to be scrutinised. The LSE will investigate Torex Retail and its stockbrokers, Evolution Securities and Jefferies International, over whether any rules have been broken regarding disclosure.

Neil Mitchell, the chief executive of Torex Retail until Wednesday, said in November that he had completed a "diligent investigation of all aspects of the business", and that the company had a "solid business platform".

The SFO has acted quickly to investigate accusations against unnamed company executives. The tip-off is rumoured to have come from a member of Torex's board, and an SFO spokesman said the individual who aired the concerns "must have some inside knowledge". Earlier this week, the SFO, in conjunction with the City of London Police, swooped on three houses within the vicinity of the company's Oxfordshire base, to gather evidence.

The SFO has declined to comment on what it is investigating, and has not named the implicated individuals. Mr Mitchell has said that his residence has not been investigated, and added that finance director Marcus Leek had not been raided.

Mr Mitchell has allegedly been at loggerheads with the Torex Retail board since a positive trading statement was issued in January. At that stage, the company boasted £80m of new contracts in the final quarter of 2006 with large customers like Argos, Homebase and Swarovski.

Only eight days later, the company suspended its shares, and told the market that it would miss market expectations significantly as a result of contract slippage. The chairman Chris Moore flew back from Japan to attend a crisis board meeting before the suspension. In the aftermath of the SFO raids, Mr Mitchell and Mr Moore stood down from their positions, but remained on the board. While Mr Moore has "agreed to step aside", according to Torex, Mr Mitchell has "been asked to step down". Mr Leek has survived the shake-up for now.

Iain Lynam, a restructuring expert, has been appointed as Mr Mitchell's replacement, and will run the company on a day-to-day basis. Geoffrey Forster, a Torex Retail veteran, will replace Mr Moore as chairman. Analysts are concerned that Mr Forster would remain "Moore's man" within Torex Retail, given the pair's long working history.

iSoft decided to split off the retail business it inherited via the Torex merger.
Mr Moore also dabbled in the world of football, taking over Oldham Athletic in 2001. The club was struggling with its finances, yet Mr Moore promised to take Oldham back to the top tier of English football. Instead, the club fell into further financial difficulties, and fans turned on its owner, who stood down after an effigy of him was burned outside Torex's offices.

While iSoft went on to win the lion's share of contracts in the massive upgrade of the NHS's IT infrastructure, Mr Moore led an aggressive acquisition strategy to build up Torex's presence in the fast-growing retail software market.

Analysts became uncomfortable with the frenetic acquisition activity and growing debt levels.Of particular concern to analysts was the acquisition of XN Checkout in June 2005, for £73m. Mr Moore owned 10 per cent of XN, another acquisitive electronic payment system developer, and acted as chairman for the company. He denied any conflict of interest. Also of note was the departure of the former UBS banker Michael Meade, who quit as finance director last January after only three months in the role.

Bowing to concerns over his joint role as chairman and chief executive of the company, Mr Moore appointed Neil Mitchell as chief executive in September 2006. Mr Mitchell, a former adviser to the collapsed US energy giant Enron, joined the company after the collapse of takeover talks with Barclays Capital, and is understood to have been given a mandate to sell the company. Mr Leek, 31, was appointed to replace Mr Meade in July 2006 after joining from mobile phone retailer Phones4U.

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