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All of a sudden, shell companies are coming into their own. That is the view of David Page, the founder of Pizza Express who chairs AIM-quoted Clerkenwell Ventures and is trying to find a home in the leisure sector for its £4.3 million of cash.

Page proclaims ‘we are more cheerful than we have been for months’ and says Clerkenwell expects to decide on a suitable deal soon. He argues the market for shell deals has ‘hotted up’ because alternative financing routes for companies have lately become harder.

Stock market wobbles have forced many entrepreneurs to shelve conventional public floats. Banks have tightened their terms and private equity houses, which had been consistently outbidding the likes of Clerkenwell, have begun to draw in their horns.

As a result, says Page, ‘we have had a beauty parade of everything from content libraries to hotel and pub groups’. If he is right, this upturn comes at a pivotal moment for shell companies on AIM.

Regulatory changes are forcing the smaller shells that flocked to AIM in the recent past to do deals by October or lose their listing. The new rules saw an initial 38 out of AIM’s 120 quoted shells suspended in April – of which 95 remain today.

Some have done acceptable deals and regained their quotations and some still have to find deals, leaving 87 now traded on AIM. At the same time, brokers, led by Collins Stewart and KBC Peel Hunt, are introducing US-style ‘Special Purpose Acquisition Companies’ (SPACs) such as biofuel-focused Viceroy and Platinum Diversified Mining onto AIM, while PLUS Markets, formerly Ofex, hopes to catch some of the AIM shell fallout for itself.

By definition shell companies such as Clerkenwell, which floated in 2004, are those searching for businesses in need of a stock market quote. Shells come in two forms.

AIM lists 68 purpose-built shells, which have been specially created and raised cash as quoted vehicles to pursue investment opportunities. The market also lists 27 shells that were existing quoted companies with no continuing business or assets apart from some remaining cash and have been converted into similar investment-seeking concerns.

A shell company offers the entrepreneur with whom it strikes a deal an existing quote and sometimes cash as well. It can save time as a route to tapping the market and bring access to a new group of investors, already assembled.

Usually, the shell, or ‘investment company’ as they are formally called, issues shares to the investee company in what is defined as a ‘reverse takeover’, giving the target company’s owners control of the group, whose name is usually changed. The ideal vehicle is a ‘clean’ cash shell, preferably purpose-built.

With shells which had previous businesses, it is crucial to make sure they really are clean. Disgruntled minority shareholders, creditors and other unwanted baggage can bedevil prospects.

Several entrepreneurial types, some with more of a financial than a commercial bent, have become familiar figures on the shell company scene. They include Haresh Kanabar, ex-share trader Leo Knifton, Nigel Robertson, Nicholas Greenstone and wheeler-dealer Stephen Dean.

Some shells trade at hefty discounts to their assets, reflecting indebtedness, scepticism over their bosses’ ability – or a bargain. Others trade at sizeable premiums, reflecting expectations of deals afoot or erosion of the assets they had.

Deals in the offing
Clerkenwell was floated as a purpose-built shell. By contrast, fellow shell Emess has been sitting on £18.7 million cash since selling out of its unsuccessful lighting business and switching from the main board to AIM.

Chairman Rex Wood-Ward has been putting the finishing touches to a deal which will take the company into international property investment. Earlier this year, Wood-Ward opened negotiations with Stonehage, a group thought to have links with South African insurer Liberty Life insurance, about putting £20 million into a £40 million offshore Global Property Fund.

The fund would be the first of several Emess-Stonehage projects. Emess would accompany the deal with a £7 million share issue, partly subscribed to by property man Ira Rapp, whose Westcity group would find property deals. Rapp would become chief executive officer.

Elsewhere, Venteco, floated for £3.1 million by Kanabar to invest in ‘environmentally-friendly pest control’, expects ‘to finalise a deal soon’. Another Kanabar vehicle India Outsourcing Services, which raised £3 million earlier this year, is understood to have come close to a lucrative deal in the sub-continent, only to be stalled on price, but now he sees a ‘new deal’ in prospect.

Sound Oil, with £10 million cash, is issuing shares for Indonesian oil and gas play Mitra and raising £11.7 million. Biotech hopeful Immupharma floated on AIM in January when financier Richard Wollenberg’s purpose-built General Industries shell bought it for shares, changed its name and raised £2 million.

Quadrise Fuels International, with technology to improve the refining of heavy crude oil, rose out of the ashes of mining investment hopeful Zareba. Purpose-built shell Inspicio, headed by ex-British Standard Institute chiefs Keith Tozzi and Mark Silver, paid £52 million for the ailing company which had taken over the Institute and later acquired Environmental Services Group for £16 million.

AIM deadline looms
Investing in a shell means you are putting your faith in people doing what they promise. Scandal hit when one AIM investment company, Langbar International, could not account for £350 million claimed assets and founder Mariusz Rybak had made £2.5 million selling shares days before Langbar was suspended and the authorities began
to investigate.

Last year, AIM tightened the rules. The market made £3 million the minimum funds a shell could raise.

Most players accept a minimum figure proves serious intent, though some think £3 million too high. ‘The new rules were somewhat arbitrary,’ comments Kanabar, who has floated several shells within a whisker of the limit.

For investment companies which had floated before 1 April 2005 and raised less than £3 million, the market imposed a choice. They had until 1 April this year either to make a reverse takeover or satisfy the market that they had ‘substantially implemented their investing strategies’ in some other way. A company that failed to meet this deadline would be suspended. If within six months from suspension, that is by October, it had still not met the exchange’s requirements, its listing would be cancelled and shareholders left in the lurch.

Many of the sub-£3 million companies, such as Inspicio, did deals in time and avoided suspension. Professor Chris Toumazou of Imperial College, for another example, reversed his biomedical microchip business into Nanoscience, raising £6.4 million.
Fitzwilliam Capital has become German-focused mobile phone contract seller Getmobile.europe, now facing difficult market conditions. Leisure Ventures has become speculative investment group Capital Ideas.

A few were suspended in April but have come back. Ming Resources agreed a reversal with central European energy hopeful Matra Petroleum.

Others have been less lucky. Belgravia Telecom, run by Duncan Hickman and financier James Butterfield, almost clinched a deal with cardiovascular monitoring specialist MML, but it fell through and the company is still trawling.

Azure Holdings is out in the cold, though chairman Barry Gold says it has identified a target. Matisse, headed by lawyer Greenstone and backed by the Chiddingfold group, thought to be linked to the controversial Peter Catto, remains suspended Knifton’s LHP Investments is still hoping to find a deal. Kanabar’s Gasol has been negotiating an investment in West African liquefied natural gas to restore its listing.

An Ofex alternative
Shell companies excluded by AIM’s new rules can seek to list on Ofex/Plus instead, if they believe the revamped market, with its recent influx of market makers, provides meaningful liquidity. Among them, Yellowcake, headed by entrepreneurial duo Mark Watson-Mitchell and Robert Wallace, is scouting for opportunities in uranium.
Concorde Oil & Gas is probing Russia, and Israeli Acquisitor 1 hopes to back Israeli technology ventures.

Spice from SPACs
Kanabar is one shell player increasingly aware of the attractions of Special Purpose Acquisition Companies (SPACs). These are a new breed of shell, pioneered in the USA and targeted at high rollers and hedge funds.

SPACs usually seek £100 million or more. They put this into separate ring-fenced accounts and it can only be released for a first investment if shareholders vote in favour of that specific project.

SPACs tend to use financial engineering, involving warrants and other instruments, to limit investors’ risks. Broker Collins Stewart has launched several, as has KBC Peel Hunt, and Seymour Pierce is considering doing the same.

Adam Hart of KBC Peel Hunt has raised $180 million (£100 million) for AIM newcomer Viceroy, a backer of biodiesel projects aimed at hedge funds and green funds. The ring fencing and need for a vote protects investors, he argues, but the key requirement is ‘a blue-chip management team’.

More modest punters might consider a dabble in Nanoscience at 10p, Inspicio at 124p, Clerkenwell Ventures at 5.25p (25 per cent below net assets), Concateno, another Tozzi vehicle looking for water deals, at 75p, and Quadrise at 22.5p.

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