The rich investors losing money on Katies, Noni B operator

The super wealthy never want to talk about when they’re losing money. Consider Mosaic Brands, the tired and struggling retailer, where a who’s who of Australian businessmen have watched their investments shrink, as the group tries to stave off collapse. Some might argue those investors may have been better putting their money in a paddock and setting fire to it.

Since 2019, shares in Mosaic, which owns brands such as Katies, Noni B, Rivers and Millers, have slid from $2.70 to 4¢. The company’s market cap of $6.4 million means the retailer is worth less than the houses owned by Mosaic’s wealthy investors.

Among Mosaic’s rich investors are billionaire Spotlight owners Zac Fried and Morry Fraid, whose investment vehicles own just under 20 per cent of the retailer. They are also investors in a convertible note, a loan provided to Mosaic that can be converted into shares.

A who’s who of Australian businessmen have invested in Mosaic Brands from left to right: Zac Fried, Morry Fraid, Tony Berg and Phil Green.Credit: Jamie Brown

Other investors in Mosaic are Tony Berg, a former chief executive of Macquarie, and the Alceon group, co-founded by Trevor Loewensohn, a former investment banker, and former Babcock & Brown chief executive Phil Green.

Loewensohn and Green’s Alceon group has almost $5.5 billion under management. Like the rest of those wealthy investors, Mosaic is a tiny part of Alceon’s investment portfolio. Still, no one likes losing money, and how long those wealthy investors are prepared to endure those losses will factor into Mosaic’s fate.

Mosaic’s shares have been suspended since early September after the group failed to file its full-year financial accounts. Its almost 4000 employees have been wondering, too, about the company’s future ahead of what is predicted to be a subdued Christmas trading period.

Last month, Mosaic’s management revealed the group would axe its Rockmans, Autograph, Crossroads, W.Lane and BeMe brands, which includes shuttering an unspecified number of stores and laying off an unspecified number of staff.

Those cost-saving measures are part of the restructuring of Mosaic being undertaken by its management and board, which is being advised by Deloitte. Mosaic is also making use of the safe harbour provisions, a law that allows directors of a financially distressed businesses to turn around the business free of the worry of being personally pursued for possible insolvent trading actions.

This masthead does not suggest Mosaic has been trading insolvent.

Mosaic’s problems have been blamed on the pandemic, during which a lot of its customers, budget-conscious middle-aged and older women, stayed home and did not venture out shopping.

Mosaic’s management changed earlier this year with the appointment of CEO Erica Berchtold, who replaced Scott Evans, who had held the role for almost a decade.

Mosaic Brands owns Rivers, Katies, and Noni B. Last month, it said it would axe some of its stores including Rockmans.

Under Berchtold, Mosaic’s management has been trying to turn the business around by slashing costs. It has been negotiating reduced rents with landlords and in some instances, it has also offered global suppliers one-third of what they are owed in a payment plan stretching over a two-year period.

Suppliers from Bangladesh, India and China are owed tens of millions by Mosaic. As a collective, they are divided over the extraordinary losses they have been asked to absorb and also the payment plan negotiations. Do they take the small amount being offered by Mosaic, or potentially get nothing? If they accept the proposal, is there a risk they will still get nothing?

Some suppliers have engaged lawyers while others have disclosed to this masthead the offers from Mosaic will hurt or ruin their businesses. Undoubtedly, Mosaic’s negotiations have strained supplier relationships, which raises questions about it stocking its stores into the festive season.

Mosaic management have said they are working to get the best outcome for the company, its employees and partners, and Mosaic does need to slash costs to service its debts. It has a $45 million loan with Hilco Capital, on which it is charged 9.25 per cent interest. The terms of the convertible note loan were also recently reset, extending the maturity to March 2026, but with interest on that note increasing from 8 per cent to 20 per cent.

Investors in Mosaic have reason to be frustrated. In November, at Mosaic’s annual meeting, chairman Richard Facioni told shareholders the company’s strategy “will continue to deliver growth in the near term and foreseeable future”.

In June, Mosaic issued a statement advising shareholders the group would have a “marginal loss” for the full year at the earnings before interest, tax and depreciation line. By July, in another statement, this loss had grown to between $5 million to $10 million. In August, Mosaic failed to file its accounts and in September, its shares were suspended.

Facioni has been chairman of Mosaic for a decade. He also lists himself as executive chairman and founder of ACTA Capital, a private equity firm, which manages a retail group called Alquemie. Alquemie recently appointed Scott Evans as its chief executive.

Some observers are waiting to see if the Spotlight group might end up owning Mosaic. The families of Morry Fraid and his nephew, Zac Fried, own the nationwide chains of Spotlight, Mountain Designs, Anaconda and Harris Scarfe. The private Spotlight group has been trading since the 1970s and its success has earned the Fried and Fraid families a $4.6 billion fortune.

However, the risk for the Spotlight group in taking on Mosaic is the competition that Mosaic’s brands face from Chinese online retail giants Temu and Shein, where clothes can be bought for a small fraction of what is offered in Australian stores. Setting aside ethical considerations about Temu and Shein, budget-conscious Australian customers are willing to take a chance that clothing ordered from those online retailers may or may not fit, simply because it costs a pittance.

Then there’s also competition from Kmart and Big W, which apparently are picking up more of Mosaic’s customers.

Still, Spotlight might be tempted, just as Myer has been to acquire the apparel group of Solomon Lew’s Premier Investments, which includes a younger offering of brands such as Just Jeans, Jay Jays, Portmans, Jacqui E and Dotti.

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