Cash shells have become a significant feature on the AIM landscape. They come in all shapes and sizes and many are now under pressure to complete reverse takeovers by 1 April 2006. We unveil the results of our unique research.

Research carried out by Growth Company Investor’s sister publication Business XL, in association with leading AIM lawyers Pinsent Masons, shows that at the end of June there were 88 cash shell companies quoted on AIM, with a combined market capitalisation of £203.37 million — more than twice their overall net assets of £77.33 million — and cash of £77.05 million.

That compares with 69 AIM cash shells recorded in the same survey by Business XL a year ago, then with a combined market value of £159.2 million, assets of £75 million and cash of £77.3 million. Cash as a percentage of market value is somewhat down from 48 per cent to nearly 38 per cent, suggesting a slight up-rating in investors’ assessments.

However, at the same time the rules surrounding cash shells have changed. From 1 April this year, the Stock Exchange prevented shells joining AIM from raising less than £3 million. Those that had cash below this limit and were already on AIM at the end of March have until 1 April next year to complete a deal, or else face eviction from the market.

This would suggest that a frenzy of deals will take place in the next eight months as shells rush to complete reverse takeovers. The current average three-figure premium to net assets that such shells currently enjoy could begin to fall as the deadline approaches.

Clean or dirty?
Cash shells, sometimes called ‘investment companies’ because they exist to back other ventures or businesses, can be split into two camps: ‘clean’, or purpose-built for an entrepreneur to pursue a project; or ‘dirty’, companies whose previous business model did not work in the end and so have virtually nothing left, except some hard-hit shareholders.

In some cases, these disgruntled investors might be persuaded to dip into their pockets again to contribute to its hoped-for revival in a fresh guise. They would thus stand a chance of recouping or even profiting from their original investment — though their original holdings are likely to have been heavily diluted.

That is because the usual route for a shell to become an operating business is through a ‘reverse takeover’. This is where the shell uses its shares to buy an unquoted company which has an ongoing business and a boss who wants to drive it.

Our research has identified 62 clean, purpose-built shells, with a combined market value of £160.67 million, net assets of £63.22 million and cash of £60.59 million.

That compares with 26 ‘dirty’ shells, commanding a combined market value of £42.70 million, net assets of £14.11 million and cash of £16.46 million. Overall, the market puts a higher value on dirty shells, according them an average 202.56 per cent premium over net assets, while clean shells’ shares still enjoy a significant average premium over assets of 154.14 per cent.

Values and players
These totals conceal a wide range of individual valuations, based on perceptions of the key people involved in different cash shells and their backers — though a high premium can simply reflect a severe paucity of assets. For example, former share trader Leo Knifton is prime mover at dirty shell Adorian (formerly Oakgate), which trades at a premium of no less than 11,000 per cent over assets of a mere £20,000, while Nicolas Greenstone heads the controversial Matisse dirty shell, on a near 18,000 per cent premium to assets of only £10,000.

Four dirty shells trading on AIM have significant net liabilities and sport hefty discounts: Knifton’s SBS, Peter Redmond’s Synigence, Michael Jackson’s Myratech.net and Nigel Robertson’s Asia Capital. Almost all clean, purpose-built shells trade at premiums to assets, except Lance O’Neill’s EP&F Capital at a 33.6 per cent discount, and their individual premiums tend to vary in a markedly less extreme fashion than those of their dirty counterparts.

Graham Butt’s purpose-built commodities shell Commoditrade commands a 2,650 per cent premium to net assets and Paul Davis’s Sagittarius Professional Services enjoys a 2,580 per cent premium. But these are exceptional.

Some individuals and brokers specialise in AIM shells more than others. Knifton is prominently involved in five, builder-turned-wheeler dealer Stephen Dean has four and Paul Davis looms large in three, with Greenstone and Richard Armstrong, an associate of broker Fiske, running two each.

Among the brokers, active small company specialist Seymour Pierce leads the field, with 13 AIM cash shells, followed by Teather & Greenwood with nine, Durlacher with five and Nabarro Wells with four. Collins Stewart, WH Ireland and Rowan Dartington are involved with three apiece, Shore Capital and Daniel Stewart look after two each and the illustrious Cazenove handles one.

Storm of protest
The introduction of the new rules for cash shells caused a storm of protest from those in the financial community who argued the £3 million limit was too high. Critics, such as Keith Smith of broker Nabarro Wells, argued the new restrictions were unrealistic.

The opponents warned the rule changes would provoke a flood of smaller shells anxious to come in under the wire before the new rules came into force (a flood there certainly was). They also maintained the requirements would encourage already quoted shells to make unwise investments in their haste to do the required deals by next April’s deadline to keep their quotes, and also drive new business away to other markets.

Investors need to tread carefully if they are holding (or thinking of buying) shares in these shells.

This feature is part of a larger, more extensive report entitled ‘Cash Shells’ compiled by Vitesse Media. The report is available in PDF format priced £195 +VAT. To order a copy, call 020-7430 9777 or email info@businessxl.co.uk