Taking the shell route still works

The past 18 months have been dire for entrepreneurs and companies wishing to raise money by way of a stock market flotation. AIM, the London Stock Exchange’s junior market originally intended as a stable for young growth companies, has had a particularly testing time, while PLUS-quoted, also conceived as a nursery for budding new enterprises, has confronted a similarly challenging environment.

These conditions have encouraged several companies and their advisers to take a fresh look at cash shells, which offer an existing quotation, some cash in their coffers and shareholders who might be pleased to see new life breathed into their dormant investments, even at the price of diluting their percentage holdings. Among the latest to consider the shell route is entrepreneur Michael Neville, who four years ago unsuccessfully bid more than £60 million for Aston Villa Football Club.

Advisers say Neville is now contemplating a paper reverse takeover of AIM shell ReEnergy, to be used as a vehicle to acquire Chinese textile concerns making the ‘Van Yuppy’ range of leather shoes and accessories and other interests. The aim is to create a business with annual sales of the order of £60 million and a hoped-for stock market price tag of £40 million.

ReEnergy, which originally floated in 2005 as a would-be renewable energy and waste management company, sold off its remaining operating subsidiaries last year for a net £1.3 million to become an ‘investment company’, as shells are sometimes designated.

It is just one of the 31 shells listed in Cash Shells 2009, a report by Business XL, the sister magazine of Growth Company Investor. If ReEnergy’s mooted deal takes place, its cash can be used to fund due diligence for the China acquisitions.

Doing the deals
Cash Shells 2009, Business XL’s fifth annual survey of the sector, identifies 31 shells on AIM and PLUS, sporting a combined £48 million of available cash on their balance sheets. That compares with 45 AIM and PLUS shells in the previous year, when they boasted £113 million cash altogether.

This reduction is inevitable, given the impact of the credit crunch and recession on all investment markets, but the report shows that shell deals are still proving their value in testing times. Of the 16 cash shells afloat on AIM in 2008, five have completed reverse deals, two have taken on operating businesses and two have been bought.

Although PLUS boasted more cash shells last year, 19 to AIM’s 12, the AIM counters had on average £3.23 million each in the bank, much more than the PLUS shell average cash holding of £470,000. As shown in Table 2, Jersey-headquartered Marwyn Materials leads the field in terms of cash, with £12.8 million in the kitty to buy and run building materials concerns at home or abroad.

Chairman Peter Tom and chief executive Simon Vivian are reviewing several candidates and suggest this year will present ‘numerous further acquisition opportunities’, as companies see their valuations fall and put divisions up for sale in the recession. By contrast, the second most cash-rich shell identified in the report, Nettworx, at which wheeler-dealer Jonathan Rowland is a key director, recently decided there were not enough attractive investment opportunities in its chosen telecoms sector and decided to go into liquidation, distributing its £8.7 million cash to shareholders.

Caspian Minerals, with £1 million the most cash-rich PLUS shell identified in the report, recently asked for its already lightly traded Global Depository Receipts to be temporarily suspended, as chairman Alessandro Manghi and his team had obtained clearance to acquire some ‘substantial interests in onshore Russian oil and gas companies’. Earlier this year, AIM-quoted investment outfit Sigma Capital took its university intellectual property commercialisation arm Frontier IP to PLUS-quoted through the reverse acquisition of PLUS shell Allied Leisure Investments, with the help of Orange Corporate Finance and Ruegg & Co.

Ruegg emerges in Cash Shells 2009 as the leading adviser to shell companies on AIM and PLUS, with five shells in its stable, followed by Cenkos Securities with three and Alfred Henry, John East (part of Merchant Securities), Strand Partners and WH Ireland with two each. They play a key role.

To be of value, shell companies need to be free of encumbrances, financial, legal and contractual, from their past corporate existences and advisers need to ensure, as far as possible, that this is so. In the case of ReEnergy, for example, Neville’s team, if it goes ahead, will have to restructure the Chinese companies’ banking arrangements from one-year rolling finance to fixed term and seek a new source of debt.

Making shells work
Companies built from shells come in all shapes and sizes. The mighty advertising colossus WPP Group emerged 24 years ago from Wire & Plastics Products, bought by founder Martin Sorrell and a business partner for £420,000.

Fully listed international engineering consultancy Hyder Consulting, a 150-year-old business involved in building the Crystal Palace and the Sydney Harbour Bridge, was bought by Welsh Water in the 1980s and emerged from its parent (now renamed Hyder) through a management buy-out eight years ago. In 2002, the company floated on the London Stock Exchange through the reverse takeover of a shell company, Firth Holdings.

Since then, it has grown annual turnover from £100 million to £319 million, helped by acquisitions, making pre-tax profits of £15.6 million last year. Finance director Russell Down argues that government pump-priming with infrastructure projects is offsetting the private sector slowdown.

Cash Shells 2009 provides some examples of its own of successful shell deals. Among them, Dr Michael Edelman, chief executive of AIM-quoted semi-conductor specialist Nanoco Group, argues that coming to AIM in April through the reverse takeover of shell concern Evolutec has allowed the Manchester-based company to strengthen its balance sheet, after raising £4.1 million privately over a few years. The move also ‘gives us the resources needed to meet the growing demand for our products’.

The shell route paid off handsomely for gaming entrepreneurs Jonathon Shipley and Joy Hall, who sold their Shipleys Amusements slot machine chain to AIM-quoted Praesepe for £25 million last year. Praesepe, then called Aldgate Capital, came to AIM three years ago as an investment shell with £5 million. After a few false starts, it recruited gaming luminary Nicholas Harding as chief executive and raised more funds to create a ‘pan-European gaming business’.

Since the Shipleys deal, Praesepe has expanded further. Last month, the company paid £1.5 million for Issue Depth, owner of six Adult Gaming Centres in the north of England, a move which Harding says means the company has increased the number of its casino venues by 30 per cent since its first acquisition in 2008.

When Ian Taylor, co-founder and business development director of profitable digital marketing agency dotDigital, was looking for a route to flotation and some funding, he and his fellow founders hit upon PLUS-quoted West End Ventures, set up as a shell by public relations man Nicholas Nelson and with £806,000 on its balance sheet. The reversal was ‘very easy in terms of cost and time, compared with a normal IPO’, recalls Taylor.

He explains that the company was ‘being courted by a number of venture capital funds, but we wanted to retain control’. The share quote is ‘helping the business to grow, helping to recruit and motivate staff through share incentives’.

‘The equity also allows us to make acquisitions,’ points out Taylor. ‘We chose PLUS as we felt we are slightly under the radar of AIM due to our size, but we see PLUS as a stepping stone.’

Cash Shells 2009 – Full Report
The complete cash shells report provides information on:
• The number of cash shells listed on PLUS-quoted and AIM
• Rankings of all cash shells by cash holdings
• Cash shells trading at a premium to net assets
• Cash shells with net liabilities
• Active shell brokers
• Contact details for every cash shell.

To pre-order your copy of this report for £295 + VAT, please call 020 7250 7056 or email halid.delkic@vitessemedia.co.uk