Creditors lose out as Cobra emerges from pre-pack

Regardless of whether Bilimoria was unfortunate or unwise, the fate of Cobra is a stark warning as to the risks of growing top-line revenues at the expense of profitability

Cobra Beer, the Indian lager brand founded by Lord Karan Bilimoria in 1989, has been bought by a joint venture between Molson Coors, the maker of Carling, and Bilimoria himself, after entering a pre-packaged administration.

Bilimoria, a favourite entrepreneur of Gordon Brown, and to be fair, Growing Business, put the company up for sale last November for £200m, but failed to find a buyer.

Established as an alternative to the fizzy lager Bilimoria got in Indian restaurants as an undergraduate at Cambridge, Cobra has an impressive 50% of the curry house market, but its aggressively-funded attempts to break into the pub trade contributed to its demise.

It made its name as one of the fastest growing beer brands in the country, with turnover reaching £177m, but it never managed to turn a profit, and it’s thought that Bilimoria’s tactic of financing growth by rolling over debts at increasingly high interest levels led to its downfall; aggressive sales growth at the expense of the bottom line is fine in fair weather, but it’s a strategy that needed a drastic rethink in a recession.

In the last year for which accounts are publicly available, to July 2007, Cobra lost £13m. Last week’s deal means that the firm’s unsecured creditors, who are owed as much as £75m, will get nothing.

Bilimoria says he’s “gutted” about the situation, and there’s no doubt that he tried desperately hard to steer the company through stormy waters: in the spring, he called in accountants to work on a company voluntary arrangement (CVA) when it became obvious that the hunt for a buyer had proved fruitless.

Four directors stood down, including chief executive Adrian McKeown. Bilimoria also embarked on an aggressive cost cutting exercise, which included a number of redundancies.  Unfortunately, the CVA collapsed when a creditor which brews Cobra under license vetoed the plan, and a pre-pack became the only option.

It was another stroke of bad luck for the unfailingly affable peer. When he started touting the business around, Heineken, Carlsberg and InBev were already busy absorbing earlier acquisitions, putting its most obvious buyers out of the game. A private equity purchase was also off the table thanks to the liquidity crisis, and Cobra wasn’t the first business, and probably won’t be the last, to suffer because it couldn’t secure new funds from the banks.

Regardless of whether Bilimoria was unfortunate or unwise, the fate of Cobra is a stark warning as to the risks of growing top-line revenues at the expense of profitability. Cobra’s marketing budgets have remained disproportionately high, and the company was reportedly budgeting to be loss-making for another three years.

Still, in one sense, the strategy worked. In a declining market, Cobra managed 20% year-on-year growth, so Coors’ £14m for a 50.1% share in a debt free incarnation of the brand looks like a steal. No one will blame the unsecured creditors for remaining unimpressed.


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