AIM shells in the shop window

Haversham Holdings is the latest shell company to come to AIM. Its IPO went smoothly despite difficult stockmarket conditions, and the share price is up 7.5% on its float price. But the quality of shells on the junior market varies immensely.

Pizza Express tends to be used as an example of a successful reversal into a shell, in that case a fully listed one, but there are many more shells that do less successful deals or do not even manage to find a deal at all.

Shells are companies which have no significant business and can be reversed into by another company as an alternative way of gaining an AIM quotation. In 2006, AIM tried to restrict the number of shells coming to the market by ruling that they had to raise at least £3 million. This stemmed the flow of new shells set up specifically for the purpose.

However, there are still plenty of shells on AIM. A few are new shells that have raised more than £3 million, such as Haversham, but most are existing AIM companies that have exited their original businesses. The latter could have historical problems and any company reversing into them needs to be very careful and understand what it is getting in to. New shells benefit from not having any history.

Back in July, a report from Growth Company Investor said that there were 77 shells on AIM (7% of the companies on the market), with nearly one-half of them on the previous year's list. Many of the shells may not strictly be thought of as shells by their management and the exact number depends on how tight a definition is used. They include investment companies with a large cash pile, companies planning to wind themselves up that could be used as a shell, or companies with a small business that does not warrant a quotation on its own.

A lot of these shells have little or no cash, though, and in some cases it is surprising that they can find a company to reverse into them. The vast majority of the shells identified trade at a premium to net current assets - most have little in the way of fixed assets.

How to value a cash shell

This brings up the question of the real value of a shell. If there is cash then that would make up some of the valuation, but there is little else of value other than having an existing quotation and the experience of the directors. There may be tax losses but in many cases they are not usable by the company that reverses into the shell.

In reality the value put on a quotation and the board should be a few hundred thousand pounds at best. Any more than that is diluting the value of the enlarged business. Due diligence is still needed and the post-reversal company requires a prospectus to be re-admitted to AIM.

Any major reduction in cost tends to come from not having to raise as much money because there is already cash in the shell. However, there is also a cost of reversing into a shell that is valued at more than its net assets.

Actual Experience, a technology company generating information that helps businesses analyse and improve the efficiency of their digital operations, took the traditional route and was introduced to AIM in February at a cost of £440,000. No money was raised.

Social media audio platform developer Audioboo reversed into One Delta to form Audioboom in May. The costs of the reversal and gaining the quotation were £300,000. On the face of it that seems to be a saving, but it is more complicated than that.

One Delta raised £3.2 million, after expenses of £300,000, prior to the reversal. One Delta's pro forma NAV was £3.2 million because the NAV was £1,000 before the fundraising.

Audioboom was valued at nearly £7 million at the reversal price of 1.5p a share. Audioboo was acquired for just over £2.6 million in shares and the existing shares were valued at £4.3 million. This means that the premium to One Delta's NAV was £1.1 million. That is effectively an additional cost of the reversal.

The Audioboom share price has risen sharply since the reversal and it has been able to raise additional cash at higher share prices, so shareholders probably do not worry much about this additional £1.1 million but it is relevant to question if this is good value.

A high premium to cash and assets makes some shell valuations mystifying. Iafyds (IAF), which was previously voltage optimisation equipment developer VPhase, is controlled by Henderson which would make it easier to secure a reversal and the fund manager could also be a source of additional cash. At 0.04p a share, Iafyds is valued at £4.02 million. Yet Iafyds has pro forma net assets of £216,000 – similar to cash. That means that the quotation and the backing of Henderson are valued at £3.8 million. It seems unlikely that anyone reversing into Iafyds would do it at the current share price because of the effective dilution of the value of their business.

Problematic shareholders

Having an existing shareholder base can be a double-edged sword because it provides a spread of shareholders and potential liquidity, but it also invariably means that there are shareholders that invested in a completely different business that take advantage of any improvement in the share price to offload their shares. The latter can hold back the share price and mean that it can move in a specific range even if the business is performing well.

Haversham is being backed by Marwyn, which owns 29.99%, and a number of institutional investors including Invesco and Artemis. Haversham raised £30 million at 120p a share so it is a more significant shell than most of the others on the market.

Marwyn has already floated more than one dozen shells on AIM over the past decade or so, although not all have been successful. Asbestos removal business Silverdell was a notable failure, although its collapse was many years after it was floated as a shell. Marwyn tends to retain its shareholdings in the companies and this was true of Silverdell.

There are more positive stories, such as Advanced Computer Software, which started as Marwyn shell Drury Lane Capital and has grown rapidly by acquisition since 2008 while also growing earnings per share. The share price is more than ten times the original 10p a share placing price. This is partly down to the fact that Vin Murria, who had previously built up an IT business through acquisition, became chief executive at the time of the first deal.

Haversham has Avril Palmer-Baunack, who previously turned around Universal Salvage and ran vehicle transport logistics business Autologic, which was acquired by Stobart Holdings for £12.4 million in 2012. Haversham is focused on acquiring automotive, support services, engineering or manufacturing businesses with an enterprise value of at least £250 million.

Investing in shells is a lottery because investors do not know what business they will eventually own, particularly as many are focused on the resources sector, or whether a suitable acquisition can be found. W&G Investments was set up specifically to acquire banking assets from Royal Bank of Scotland, but its bid failed and it was wound up with shareholders receiving two-thirds of the cash that had originally been invested.

Shells valued at around their cash level

Quoram (QRM), which was formerly known as Bluebird Energy, decided to exit its oil and gas interests in April 2013. There was £1.73 million in cash plus quoted investments valued at £800,000 at the end of June 2014. At 0.19p a share, Quoram is valued at £1.84 million. Richard Griffiths owns 24.1% and Blake Holdings owns 21.9%.

NBNK Investments had £20.1 million in the bank at the end of June 2014 and at 38.5p a share it is valued at £20.7 million. The share price fell below the cash value and Crystal Amber Fund built a 27.9% stake. Originally set up to buy a bank in 2010, NBNK widened its search to include other financial businesses when US billionaire Wilbur Ross, whose business owns 44.9% of Virgin Money, acquired 29.9% in 2013. Still no sign of a deal.

Limitless Earth raised £3 million at 5p a share in May 2014 and there was £2.8 million left at the end of July. At 4.13p a share, Limitless is valued at £2.7 million. Limitless' initial focus is an unnamed life sciences business. Finance director Nilesh Jagatia is a former finance director of failed online gaming firm Media Corp, where Limitless founder shareholder Justin Drummond was also a director.