Street Talk

Looming class action hangs over Freedom Foods recap

Sarah Thompson, Anthony Macdonald and Tim Boyd

Oct 6, 2020 – 7.58pm

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Freedom Foods is the No.1 candidate for a shareholder class action on the ASX boards.

Huge inventory writedowns, murky management changes, capital concerns and now an urgent need for a recapitalisation all spell trouble for Freedom Foods, and makes it a sitting duck for a chunky shareholder class action.

Tony Perich, Freedom Foods' deputy chairman, whose family has a controlling equity stake in the company. Jacky Ghossein

While the class action law firms are excited, it's hard to launch a class action until Freedom Foods shares resume trading from what's already a 4½ month hiatus. The lawyers need to see Freedom Foods' share price tank, so they can quantify shareholder's losses.

But Freedom wants to secure its recapitalisation before getting back on to the ASX boards. Its major lenders, NAB and HSBC, have shown incredible patience but want to be paid back (at least in part) by the end of November.

Freedom, advised by Moelis, is considering all options for the recapitalisation; equity, debt, or a mixture of both. Freedom and Moelis interviewed investment banks for a spot on the mooted equity ticket last week.

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FNPFreedom Foods Group

$3.010.00

1 year1 day

Nov 19Feb 20May 20Aug 203.004.005.006.00

Updated: Oct 6, 2020 – 7.03am. Data is 20 mins delayed.

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But how do you raise equity when there's a prospect of a big shareholder class action? How do you assure any incoming investors that their funds will not be used to fix past problems and settle a court case?

Which comes first?

So Freedom's got a chicken and egg problem: it's hard to raise equity until the class action lands, but the class action cannot land before the shares resume trading. And the shares won't resume trading until after the recapitalisation.

The solution may be to fix the debt problem with more (but lower ranking) debt, repaying NAB and HSBC with a subordinated loan. That would keep the banks happy, while the debt could be issued with clauses attached that couldn't accompany an equity raising.

For example, the loan could have a condition that proceeds could not be used to settle a class action.

The question then is where would such debt come from? The obvious answer is the Perichs, who own a controlling equity stake and have told Freedom Foods they intend to support the company's recapitalisation.

Otherwise it's the sort of financing package that could be shopped to a distressed debt/special situations fund. And we know Moelis is the best in the market at stitching up those kinds of deals.

What a cluster you know what