RFG's 'remarkable' actions could attract more class actions

Retail Food Group’s doubling down on its decision to keep the market in the dark about a major refinancing initiative even as its share price spiked 70 per cent looks set to spark fresh interest from class action law firms.

To recap, RFG's share price started rising on Friday, July 5 and by Monday had lifted 50 per cent and attracted the attention of the ASX. RFG responded publicly telling investors it had no news for them.

But the following day, I revealed the company was telling bidders circling its business that they were out of the running as there was a preferred contender.

That flushed out an announcement after the market closed that indeed RFG was talking to Hong Kong-backed Soliton Capital Partners.

The remarkable chain of events prompted another please explain from the ASX which RFG brushed off saying Soliton's proposal was not firm enough to warrant an announcement and so was not price sensitive information.

Against this backdrop Slater and Gordon head of class actions Ben Hardwick says the embattled franchise giant’s decision to keep quiet despite the surge in shares is "remarkable".

Slater and Gordon class actions head Ben Hardwick.Credit: AAP

This is because, under the ASX’s continuous disclosure rules, companies must inform the ASX when they become aware of any information that could have a material impact on the share price.

"Once the share price started rising it was incumbent on the company to keep the market informed of the changes," he said. "Instead it doubled down. My view is it is particularly remarkable that it felt the market didn’t need to be informed of the major refinancing deal in the current environment."

He says Slater and Gordon isn’t running the ruler over a class action but he said he wouldn’t be surprised if other class action law firms were.

Vas Kolesnikoff, head of research at proxy advisers Institutional Shareholder Services told The Age that the share price rise suggested news of the deal had leaked and RFG should have released the details to the market or gone into a trading halt.

Instead what we got looks a lot like market speculation and possibly insider trading.

Clearly something prompted the spike. Whether it was a leak in the company or something else, it needs to be investigated.

The brutal reality is even now investors are operating with partial information.

The market has been told RFG is dealing with Soliton Capital Partners and the recapitalisation proposal is for around $160 million - versus a market capitalisation of about $37 million.

The media witch hunt of RFG, admittedly aided by the timid non response of RFG is a disgrace.

Former RFG CEO Garry Alford

Crucially investors don’t know how much of that will go to equity.

If it is $60 million, current shareholders would be roughly diluted to 5-10 per cent of the total equity so current shares would really be worth as little as a few cents, not the 19 cents it was trading at late on Friday.

That's assuming the business has equity value. When RFG releases its June 30 financial results, all eyes will be on its cashflow and any further announcements on how it intends to turn around a business that has been dogged by scandal after scandal in recent years.

The first came to light in December 2017 when a media investigation by The Sydney Morning Herald and The Age exposed a brutal business model that was pushing hundreds of franchisees to the wall. Since then RFG’s share price has fallen from $4.40.

The scandal triggered a parliamentary inquiry into the $170 billion franchise sector. The inquiry's report, released in March, singled out RFG and certain of its then and former directors and executives as targets for regulators over potential insider trading, tax avoidance, directors’ duties breaches and poor market disclosure.

Until Corrs Chambers Westgarth announced a potential class action on behalf of franchisees, former RFG chief executive Garry Alford has stayed silent on RFG.

In mid-June he was spurred to speak out on LinkedIN, saying: "I was an executive of RFG for a number of years (21). I have to date refrained from commenting on the public decimation of what was a great company.

"I conducted my years with a philosophy ‘if it benefits the franchisee then let’s proceed’. That however has been drowned by this country’s appalling media, some former franchisees who refuse to accept responsibility for their own shortcomings, no matter the help and assistance offered to them."

He went on to say "the media witchhunt of RFG, admittedly aided by the timid non-response of RFG, is a disgrace".

It was an interesting spray that signed off with the words "I have been curtailed by character limits".

He is right that RFG has been largely silent through the various scandals.

The hope is that when it releases its results it will update the market on the refinancing proposal and any asset sales. RFG has repeatedly told the market it is looking at selling assets to help pay down debt.

Curiously, one of those businesses, Dairy Country, which is cashflow positive, has attracted a number of interested parties to the sale in the past few months, but there has been limited appetite to bag a sale.

Sources close to Dairy Country estimate it has an enterprise value of more than $40 million and there are serious buyers but nothing has eventuated. It is yet another case of keeping silent and keeping investors in the dark.