Interactive Investor

How AIM shells can grow by 1,000%

1st May 2015 13:58

Andrew Hore from interactive investor

AIM shells continue to be in the news as Gate Ventures continues to defy logic, gravity and any other art or science. Looking at the main reversals into shells in 2014 there were some deals that were done at a share price that was more than 50% below the share price prior to the announcement. Even so, there were some excellent share price performances.

It appears likely that Gate will have to do a deal at well below its current price. Management says that Gate has £2.82 million in the bank, while it is still valued at well over 20 times that figure. The latest news from the shell still provides nothing to warrant this valuation.

Johnny Hon has become a consultant to Gate for £4,000/ month, which he appears to be taking in cash rather than shares. He boasts about his connections in China but his record with UK-quoted companies is poor. He was a director of at least five Plus-quoted (ISDX) companies between 2006 and 2010. none of which could be called a success. Two of them, Global Education and Global Entertainment, both left Plus after Atlantic Law, a law firm run by disgraced lawyer Andrew Greystoke, resigned as corporate adviser in 2009. Hon left the boards in the same year.

Hon was also a director of AIM-quoted companies including Chinese gaming and lottery company Betex, which moved from Plus to AIM in March 2006. The quotation was cancelled in October 2007, after problems with the Chinese authorities over allegations about illegal gambling which were subsequently cleared up. Hon resigned as a director in 2008. There was a dispute about money owed by Hon and his group companies to Betex, which claimed £750,000 but settled for £236,000 after paying legal fees of £127,000.

Hon knows Jun Zhu, who bought shares in Gate after the flotation and is a proposed director. Hon introduced Zhu to Gate executive chairman Geoff Morrow, another long-term associate of Hon, before Gate floated. Hon also introduced five of the original shareholders in Gate to Morrow.

But enough of Gate for the time being and on to 2014 reverse takeovers and their pricing performance.

Indicators in 2014

The table covers the main reversals into shells during 2014. The shells covered range from those that were floated as cash shells to those that had a small, existing business but were transformed through the reversal. Some, such as Nasstar might not be described as a shell by some people because it already had an existing cloud computing services operation, but the deal transformed it into a profitable and much larger business.

There were some other reversals not included in the table where there was not a large amount of money raised at the time and/or a share element to the consideration or where reversals were into companies that already had a significant business.

I have left Collagen Solutions' second reverse transaction in the table because it provides an interesting comparison to the original reversal into Healthcare Investment Opportunities in January. The share price fell back after the original reversal, but the performance since the second one, which was done at a share price that was 44% below the original reverse price of 12.5p a share but at the then market price, has been much stronger. The original shell had traded as high as 16.5p in July 2013.

Three of the companies did their reversal and funded it with share issues at a premium to the share price before the deal was announced. All three were shells which had former operations that had been shed prior to the deals.

In the case of AimShell Acquisitions, the shell that mobile payments technology developer Mi-Pay reversed into, the company's net asset value was 36.6p a share, predominantly made up of cash, compared with a market price of 33.5p a share. This means that the share issue at 41p a share was at a 12% premium to NAV - equivalent to £460,000. The share price had not been as high as 41p since 2011 when the company was still known as Autoclenz.

Feedback had a NAV of nearly 0.5p a share and issued shares to acquire its medical technology businesses at a notional price of 1.25p a share (£625,000). That is equivalent to a premium to NAV of £938,000, however, there was no placing at this share price so it is difficult to assess whether this was a realistic price.

Financial adviser Tavistock Investments was the only one of the three companies that issued shares at a large premium to NAV even though the Tavistock share price had already fallen from around 30p a year earlier.

Discount deals

There were 12 companies that issued shares at a discount to the previous market price. Music streaming technology supplier 7Digital had the largest discount. The share price of UBC, the company's previous name, had soared ahead of the reversal and were suspended at 62.5p a share compared with a 27p placing price. That is a 57% discount.

In this case the potential acquisition of the 7Digital business was first announced in November 2013. The terms of the deal were originally expected to be agreed by the end of April 2014 but it took slightly longer than anticipated. The share price had also benefited from the company having a stake in Audioboom. The eventual placing price was nearer to the share price prior to the original announcement of the proposed 7Digital deal.

There are ten companies where the share price has fallen below the deal price at some point, while the rest have always at least traded at the deal price or higher, although two of these companies had traded at below the price prior to the reversal announcement.

The overall performance of the shells is good. Excluding Collagen Solutions, there are eight companies trading above their deal price and six trading at a loss. Three of the poor performers are resources companies. The strong performers more than offset the losses made by the other companies.

There are some highly impressive performers. The best is Tiziana Life Sciences, where the original deal price was less than one-half of the previous market price. Tiziana, which is developing treatments for cancer, has more than made up for that with a 787.5% gain in little more than one year. However, anyone who bought shares five years ago in the company's previous incarnation would still be losing money.

Social media and audio business Audioboom was at one point the best performer after its share price hit 16.63p - a gain of more than 1,000%. The share price has fallen back, but Audioboom is still 358.7% higher. However, Audioboom is not expected to breakeven until the year to November 2016, so there is little to keep the share price up in the short-term except for investor optimism. Any slippage in forecasts could hit the shares.

The other strong performer is OptiBiotix Health. Although, like Audioboom, there are no fundamentals to hold up the share price, the human microbiome-based health treatments developer is making good progress towards developing commercial products that can be used to tackle obesity and high cholesterol levels. It will not take OptiBiotix anywhere near as long to develop money making products as it will for Tiziana.

Technology adviser MXC Capital and Premaitha Health are also trading at more than double their reverse transaction prices.

All of the five best performing companies issued shares at a discount to the previous market price. Audioboom did its transaction at the lowest discount - 14% - while the rest had discounts of between one-third and one-half.

Not all shells make a good home

The table includes shells that have found a suitable acquisition, but this is only part of the picture. Not all shells find a suitable acquisition and they run out of time and have their AIM quotation cancelled. Shells have 12 months to satisfy their investing policy before trading in the shares is suspended. There are then a further six months to complete the policy before the quotation is cancelled.

Mercer Resources, Speymill, African Eagle Resources, Cientifica and Galleon Resources have all left AIM in 2015 because of their failure to find an acquisition. Some might eventually return in a new guise but most probably won't.

Iafyds does not have much cash, but Henderson owns most of the shares so this simplifies the negotiations concerning a reverse takeover. However, Iafyds, which was formerly voltage optimisation technology company VPhase, has not been able to find a suitable deal and the shares are suspended with the board near to making a decision to wind up the company.

The suspension price was 0.0075p, although the share price had been as low as 0.005p having hit 0.0525p just after Iafyds became a shell. The NAV was 0.0005p a share at the end of 2014. So, even the low is ten times the NAV of the company.

Shells can secure a good business, but there is no guarantee that they will, and if the share price gets too far ahead of reality then it will be even more difficult to secure the right acquisition.

NameCodeBusinessReversal date (2104)Pre-deal price (p)Deal price (p)Low (p)Current price (p)Change on reverse price (%)
Collagen Solutions (Healthcare Investment Opportunities)COSHealthcare02/0112.3812.56.7510.75-14
NassterNASACloud computing services10/0110.556.1258.5+70
Tiziana Life SciencesTILSHealthcare24/0425.51224106.5+787.5
Mi-Pay GroupMPAYMobile payments29/0433.54121.7522.5-45.1
FeedbackFDBKMedical Technology 19/050.81.250.991.9+52
AudioboomBOOMSocial Media20/051.751.53.886.88+358.7
Tavistock InvestmentsTAVIFinancial adviser02/066.57.52.012.05-72.7
7Digital (UBC Media)7DIGMusic streaming technology10/0662.5271317.75-34.3
Zoltav ResourcesZOLOil and gas18/061041004267-33
Hunter Resources HUNMining04/071.751.50.250.4-73.3
Premaitha HealthNIPTHealthcare04/0719111023.13+110.3
Tengri Resources (mentum)TENMining15/074128.7523.13-89.1
OptiBiotix HealthOPTIHealthcare05/08148835.75+346.9
Plutus Powergen PPGRenewable energy generation22/080.80.60.481.02+70
MXC Capital MXCPTechnology adviser29/101.4811.483.45+245
Collagen SolutionsCOSHealthcare10/12778.87510.75+53.6

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