Please refer to our disclaimer at the bottom of the report.

Victoria is an AIM-listed company that was established in 1895 and is based in Kidderminster, England. It creates, manufactures, and sells carpet and flooring products, primarily in Europe, North America, and Australia. 

The bull case for Victoria is that reported sales over the last ten financial years grew 34% annually to reach £1bn in FY22. This rapid expansion was created through a roll-up of over 20 companies since FY13. Victoria completed five deals in FY22 alone. 

Source: Victoria filings

However, despite the company’s shopping spree, its earnings have been disappointing.

Source: Victoria filings

Victoria also has no tangible equity (minus £302m) if you exclude intangible assets from acquisitions. This is because debt, largely senior secured notes and preferred equity, was used to pay for most deals. As a result, total debt was 120x higher at the end of FY22 at £1bn, versus £8.6m at the end of FY13. 

Even worse is the free cash flow. The group’s total FCF for the last 10 financial years was minus $493m. Peers Headlam Group and Mohawk Industries, on the other hand, produced £246m and $2.1bn (~£1.6bn), respectively.

Source: Capital IQ and Iceberg calculation Note: USD-denominated Mohawk numbers were translated to GBP 

We have serious doubts over the value of Victoria’s acquisitions 

This is normally how acquisitions are presented in the annual report for a “regular company”:

• Target company name.
• Seller identity.
• Summary financials of the acquired company.
• The resultant goodwill based on the difference between the fair value of net assets and the purchase price.

Two of Victoria’s ‘acquisitions’ worked very differently:

• Companies Victoria claimed to have bought were in fact its own existing subsidiaries.
• Victoria made these entities look unrelated i.e., their names were changed before ‘acquisition’.
• Assets (and not equity) were seemingly acquired from outside the group. But there was little information on their nature, value, or how well they did before the acquisition. 
• There was minimal to no information on the asset sellers at the time of these transactions.

There appeared to be just one goal: to keep Victoria’s investors from discovering exactly what was purchased to justify the acquisition price. This raises major concerns about the integrity of Victoria’s financial reports and the reliability of its auditor, Grant Thornton.

1) Hanover Flooring Limited

Hanover Flooring Limited (“HFL”) was acquired on 26 January 2021, for £25m. The company was described as a seller of flooring products to ‘wholesalers, retail groups, and independent stores throughout the UK’.

Source: Victoria filings

We were unable to find any press release from Victoria that identifies the HFL seller. 

HFL was never acquired. It was actually an existing group company that was known as Carpet Line Direct Limited from 2015 to late 2020. Carpet Line was initially held through group subsidiary Whitestone Carpet Holdings Limited. That control was transferred to fellow subsidiary Victoria Midco Holdings Limited in December 2020.

Source: Companies House UK

Carpet Line was renamed Hanover Flooring Ltd (see below) just two months before the acquisition in January 2021.

Source: Companies House UK

Then, probably to obfuscate the disappearance of Carpet Line, Victoria formed an entirely new entity with the same name “Carpet Line Direct Limited”, a few days later on 2 December 2020. We think the change of name and the creation of a new Carpet Line were done so investors would not recognise HFL as an existing subsidiary. 

Source: Companies House UK

The most important question for Victoria ’s investors is what exactly did it buy?

• We could not find any records of an active Hanover Flooring registered in the UK before the acquisition date.
• HFL does not seem to have a website of its own unlike most of Victoria’s other brands. We only found one for an unrelated Hanover Flooring in the US. 
• HFL is now presented as a non-trading company in the FY21 report, post-acquisition. It has a subsidiary called Hanover Carpets Limited that was dormant from FY15-FY21. Notably, according to UK filings, Hanover Carpets was owned by Saqib Karim (one of Victoria’s senior managers) and his family. We will talk more about Karim in the next section. 

Source: Victoria’s website

Source: Victoria FY21 annual report

• The key audit matter section of the FY21 report shows HFL holds the ‘trade and assets of MAK Flooring’. The only MAK Flooring — now called 123 NewCo Limited — we could locate is in Birmingham. Public documents show that MAK Flooring’s accounts for FY21 are late. It may be struck off soon.

Key audit matter describing HFL and MAK Flooring

Source: Victoria FY21 annual report

HFL was identified as a ‘newly incorporated entity’ in the FY21 audit report, despite the fact that the change was only cosmetic. How an auditor could have missed the fact that the company has been around since FY15 is beyond our comprehension. Even more remarkable is that the alleged purchase of an existing subsidiary resulted in negative goodwill of £2.2m. 

What exactly was transacted for £25m is still a mystery. The HFL acquisition was most likely a cover for the real deal, whatever it was, and has kept investors from learning about its true nature.

2) Ezi Floor Limited (“Ezi Floor”)

Another deal of a similar vein occurred when Victoria acquired the assets of underlay maker Ezi Floor on 3 October 2016, for ~£17m.

FY17 disclosure for Ezi Floor acquisition

Source: Victoria filings

It was only three years later in the 2019 annual report that Victoria’s chairman suggested that Ezi Floor was acquired from Saqib Karim. This Karim had “established Ezi Floor a few years previously and had built an incredible carpet underlay manufacturer business from the ground up” [p.6].

Corporate filings tell a different story. Victoria did not buy an Ezi Floor owned by Karim. Ezi Floor was already a group company that was created just three weeks before (13 September 2016) the acquisition. It was first known as Victoria NewCo Limited (“Victoria NewCo”). 

Ezi Floor’s date of incorporation and registered office address

Source: Companies House UK

Victoria Midco — another group subsidiary — owned NewCo’s shares, while chairman Geoff Wilding and finance director Michael Scott were the new entity’s directors.

Extracts from 13 September 2016 incorporation documents showing initial shareholder and directors for Victoria NewCo

Source: Companies House UK

We believe Victoria tried to hide the subsidiary connection once more. NewCo became Ezi Floor on 30 September 2016, after a resolution to rename the company was passed.

Extract showing Victoria Newco’s name was changed to Ezi Floor on 30 September 2016

Source: Companies House UK

Like the Hanover deal, we believe this acquisition was structured as an asset purchase rather than shares, so investors would be unable to trace the financials of the previous ‘entity’. The likely intention behind the complicated steps for this deal was to hide Ezi Floor’s true value, which is probably much less than £17m.

It’s worth noting that Ezi Floor’s basic website has not been updated since 2012. 

Source: Wayback Machine (2012) and current Ezi Floor website

Additionally, the Airedale Business Park in Keighley, England, is where you will find both Ezi Floor and Hanover Carpets, which we are sure is just a coincidence!

Source: Google Maps

What’s the game?

We are left to wonder, given the convoluted steps taken by Victoria for these acquisitions, what these assets were really worth. Was any money ever exchanged, and if so, how were the funds used?

We have considered the following possibilities:

• Enrich insiders: Money is funnelled to insiders under the cover of acquisitions.
• Fake sales: Fake acquisitions are designed to flush out fake sales and maintain Victoria’s ‘rapid growth’ narrative.
• Round-tripping: Money is returned to the group after being transferred to different companies or locations. This gives the impression of legitimate business with suppliers and customers.

We can only speculate. But it is clear these transactions undermine Victoria and Grant Thornton’s credibility. How reliable are Victoria’s financials if the auditor didn’t know that HFL was not a new company?

Two of Geoff Wilding’s previous ventures went bankrupt

Victoria represents Chairman Geoff Wilding’s fourth venture. Two out of the previous three ended in failure. Wilding’s main partner was Rodney Martin. He seems to be in the picture once again with Victoria.

• CommSoft: Wilding was at the helm of New Zealand-based software developer CommSoft from September 1997 to April 2002. Martin was the chief operating officer. 

Source: CommSoft’s 2000 IPO prospectus

The company started trading on the ASX in September 2000 at A$1.10 per share. That price was a measly A$0.08 around a year later. Investors were promised profits of A$6.6m at the time of the IPO. But things flipped sharply nine months later as CommSoft warned its expected profit would be a A$17m loss instead. Reports at the time stated that CommSoft was rapidly burning through cash. It was a victim of over-ambitious forecasts and a growth strategy that it couldn’t support in a slowing market.

CommSoft eventually became a shell after it was placed into a short-period of administration in 2003, had its New Zealand and Australian subsidiaries liquidated, and shares suspended.

• Carpet Court: Kiwi-based Carpet Court — owned by Flooring Brands — was another roll-up of carpet and flooring stores. Martin started Flooring Brands in 2004. Wilding was an investor. 

The company embarked on a major programme of acquiring several carpet and flooring stores. Martin’s plan was to keep going until the group controlled 50% of the New Zealand market.

His equity along with those of other shareholders were eventually wiped out in 2015. Carpet Court was making losses and on the verge of receivership, according to Australian fund manager Allegro, who bought the distressed company.  

There is reason to believe that Martin and Wilding are still working closely together. Martin does not appear as a manager or director for Victoria and its subsidiaries. However, as reported by Dutch corporate advisory firm Adagium, Martin approached the owner of underlay manufacturer Estillon BV, which was acquired on 8 November 2019 for €5.7m (£5m). The owner described Martin as “mergers & acquisitions advisor at Victoria Plc”.

The coming together of this ‘dynamic duo’ raises concerns over Victoria’s future. But Wilding’s future seems secure. The chairman has a $65m yacht called the Resilience that was delivered last year.

Picture of the Resilience Yacht owned by Wilding

Source: SuperYachtFan

Fast growing inventory may require impairment

There’s a good chance that Victoria is having trouble getting rid of excess stock, given the way things have been building up. Its inventory balance stood at £281m at the end of FY22, representing 156 days of stock, versus 107-110 for peers at the end of 2021. 

Source: Capital IQ and Iceberg calculation

Things are unlikely to get any better, as the COVID pandemic comes to an end, and people spend less on home renovation. We estimate inventory write-downs of at least ~£83m, about 30% lower, if Victoria’s inventory levels were similar to its peers (110 days).

This write-down would impact Victoria’s balance sheet in the following ways, as shown below.

Conclusion

Because of an audit that appears to be lacking, worries over the integrity of financial statements, and Chairman Geoff Wilding’s past, we are short Victoria Plc.  

Victoria’s management team should make things clear for lenders and shareholders:

1. Why did Victoria create another entity under the same name ‘Carpet Line Direct Limited’ in December 2020?

2. Why were the acquisitions of Ezi Floor and HFL disclosed as third-party deals while they were Victoria-controlled entities?

3. Please provide details on the historical financial performance of the assets supposedly held by HFL and Ezi Floor, for the three years prior to their completion dates.

4. What happened to the proceeds from both acquisitions? Who received the money? How were they used?

5. Victoria’s inventory days are significantly higher than peers such as Headlam and Mohawk. Which entities and/or geographical regions are experiencing the most significant build-ups? What did both the auditors and Victoria do to determine that there was no need for inventory write-downs at the end of FY22?

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