Cobra Beer, owner of the lager brand marketed as ‘less fizzy’ and thus somehow more suitable for curries, went bust at the end of May. As Cobra struggled to survive around 100 staff lost their jobs. Cobra owed unsecured creditors a staggering £75 million. The brewer Wells & Young’s, which manufactured the ‘Indian’ beer not in India but Bedford, was owed many millions of pounds.
So, given some expectation of natural justice, we would expect Cobra’s owners and investors to lose control of the business they failed to run properly; the business to be sold to new owners who might have the skills and strategy to make it a success; the trade creditors who made, distributed and promoted the beer to get whatever value remained to recompense them for their work. Life is not that fair, and certainly not in the world of the ‘prepack administration’.
Karan Bilimoria gets his hands on liquid gold
Cobra Beer was controlled, until the end of May, by Lord Karan Bilimoria. Bilimoria was nominated for his CBE in the same 2004 Queen’s Birthday Honours List as the infamous Sir Fred Goodwin, who ran Royal Bank of Scotland into the ground. Subsequently upgraded, the now Lord Bilimoria seems as adept as Goodwin at ensuring his own personal enrichment at the expense of his employees and creditors. The phoenix Company that has risen from the ashes of Cobra with indecent haste is 49.9% owned by a certain Karan Bilimoria, with the remainder purchased by Molson Coors. Meanwhile, the people who ran the adverts or bottled the beer are left without payment, as the sacked employees are left without jobs.
Lord Karan Bilimoria always seemed to run Cobra Beer as a personal promotional vehicle. Bilimoria appeared to spend more time on speaking engagements than running the business, and the judgement and emotional security of any person willing to become Chancellor of Thames Valley ‘University’ must surely be questionable. When cantankerous examined the Cobra balance sheet, a few years ago now, there wasn’t enough surplus cash to pay a telephone bill. The last, truly last, set of accounts showed that the Company lost a staggering £15.9 million on a turnover of £34.1 million; growth isn’t hard to achieve if products are sold for half the amount that needs to be charged to break even, never mind make a profit. That a company voluntary arrangement (CVA) was vetoed by the credit insurer of Wells & Young’s, which actually did the work of brewing the beer under licence, indicates that legal action may be likely. It is hard, at first glance, to see how Cobra was not trading while insolvent or how its auditors, PWC, managed to repeatedly give it clean bills of health. As an aside, cantankerous could never understand the point of attempting to turn Cobra into a global brand when the US rights were owned by a rival.
While the discussion of moral hazard is often restricted to economic principles and banks, and while everything should be done to salvage businesses, what happened with Cobra Beer can’t be right. Yes, trading partners should not have been so foolish as to allow themselves to become so exposed to a company with such woeful financial performance, but when businesses are restructured it cannot be appropriate to reward incompetence at the expense of suppliers and employees. What was Cranfield School of Management thinking when it awarded Bilimoria its 2008 Entrepreneur Alumnus of the Year award? And cantankerous really can’t understand why Molson Coors would want a businessman with the record of Bilimoria to own 49.9%, and be Chairman, of a business in which it has invested £14 million.
Lord Karan Bilimoria wins the June 2009 Waster of the Month award for wasting:
- the time of his speaking engagement audiences lecturing them on entrepreurship and his ‘success’;
- the money of his suppliers;
- the talents and efforts of his former employees;
- and, lastly, a peerage.
Lord Karan Bilimoria of Chelsea is a smooth talking incompetent who ran what is one of the world’s most fascinating Ponzi schemes. Recall that a financial Ponzi scheme is where in essence the third person entering the scheme has his capital used to pay interest to the second person, and so on. The scheme continues till the nth person doesn’t enter and then collapses.
Cobra beer presents an interesting case study. The business never made a profit in its 20 years of existence. Massive amounts were spent on “marketing the brand” – both above the line and below the line. As a results, sales grew, but given the high marketing spends, there wasn’t a penny in profits in its 20 year existence.
Of course, if this continues over time, the business net worth erodes every year and it runs out of cash. When this happens, it takes on more debt or sells equity. It continues the marketing spends with the cash it receives from the debt/equity issuances, and builds profitless sales. Finally, this source of funding dries up. It then resorts to riskier financing like factoring and payment in kind notes. This too reaches its limits. As the business goes into a death spiral, and keeps burning cash, it withholds payments to suppliers – in this case Wells and Youngs the brewers who actually made Cobra beer. (Recall that Cobra owned nothing and made nothing, it being basically a marketing and PR machine for “building” the Cobra brand).
Finally, the company/Ponzi scheme is incapable of sustaining itself. The outside financing entering the scheme is impossible to sustain the amounts spent on marketing. The inflated profitless sales are used to entice a buyer but no one bites (obviously). This despite one of the most well oiled PR machines in the business. The business goes bankrupt. Due to the intricacies of UK bankruptcy law, secured creditors and the man himself got something out of it. Unsecured creditors – the long suffering Wells among them – got shafted to the tune of 75 million pounds.
What is shocking is how such a man, a smooth talking incompetent who ran his business into the ground, could write a book on entrepreneurship – a second one to be published this week – and be lauded as a role model by Labour. And now he’s trying to raise cash for his Indian operations !!! This is shamelessness.
Suckers are born every minute.
If for a period of 20 years, people cannot spot the risk in dealing with a company which does not make profits, then they deserve what they get. Creditors were greedy to do business assuming they would be paid. I hope employees were paid off.
What were the auditors doing? Presumably the accounts were qualified as a going concern problem at least in the last few years.
what a shame this strategy did not work. but is it true the cobra finance director was related to lordy karan? why dont financial journalists do their job and spot problems before they occur?
As an example of the delusions of the English public regarding Cobra beer, consider the following prize comment, a blurb on the cover of Mr. Bilimoria’s second book on entreprenurship, published incidently the week the company went bankrupt !!
….
‘Inspiring!… worth the cover price for the Financing Cobra chapter alone.’ Professor John Mullins,
London Business School
THIS, FROM THE CHAIR/PROFESSOR OF ENTREPRENEURSHIP AT LBS. WHAT IS GOING ON HERE ?
Paul, surely some basic checks could have been made by the various people involved before accepting bilimoria as a lord,chancellor,business guru etc. Is it because of his ethnic background that these checks were not done?It now makes it doubly difficult for other more deserving people to be recognised by the establishment ie once bitten……well done lord b, your ethnic community salutes you!!
This man ran a Ponzi scheme just like Bernard Madoff. He is a liar and a cheat. He was undone by his greed when he put the company up for sale for 180 million pounds. Had he tried to sell it earlier for a quarter of that sum, he would have been able to start another Ponzi scheme
http://gagapku.com/forumkita/topic.php?id=89761&replies=1#post-92597