SFI, dubbed "Severely Financially Incapacitated" by the Daily Telegraph this morning, admitted at yesterday's AGM that it was in breach of some of its banking covenants and it would not be paying its final dividend, after rapid expansion had left it short of cash.
It added that full-year profits were likely to be "below expectations". At yesterday's share price, SFI was trading at just 1.6 times forecast earnings.
Greg Feehely, senior leisure analyst at Old Mutual Securities, said poor management and profitable brands had left SFI vulnerable to takeover. "Cash is king, and they have run out of it. They expanded too quickly.
"The company is clearly at the mercy of its bankers, at least short term, and could well fall prey to a better capitalised competitor. After all the company does own some quality brands that all operate in the top echelon of the managed retail sector".
At Investec Securities, analyst James Wheatcroft agreed the falling shares could lure predators. "The problems are mainly financial, rather than operational," Wheatcroft said. He cut his estimate for SFI's 2002-03 pre-tax profit by 10% to £21m.
Another analyst said: "They're getting squeezed between Wetherspoon and Luminar, not a good place to be." However, he suggested potential buyers would be wary, given SFI's current state: "Whoever buys this buys an estate that's 100% leasehold and highly geared into any downturn. Buying a business geared at 140% exaggerates variations in trade."
A fourth said: "This company is guilty of over-expansion beyond the cash resources it had in place. It has been walking a tightrope for a long time and has finally fallen off." SFI opened 46 outlets in the last financial year and another eight so far this year. It has now suspended new openings
Only a month ago, when SFI first admitted it was having cash flow problems, it insisted that it continued to trade within existing bank facilities, first-quarter trading was "positive" and the final dividend would be paid. Yesterday, however, SFI's chief executive, Andrew Latham, said: "What we have told the market has always been absolutely accurate, but circumstances have changed and we now stand in a different position to where we were on September 19."
In perhaps the understatement of the week, Latham added: "I don't think shareholders are terribly amused." He admitted the company had expanded too quickly, while a softer trading environment, delays to the sale of non-core assets and increased creditor pressure over the past four weeks had contributed to the difficulties.