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AIM share consolidations: winners and losers

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It is rare for a company to consolidate its shares twice in one year but Motive TV () has done this. It may seem strange but Motive TV's hopes that the initial five-for-one consolidation would be enough for its needs proved too optimistic. Motive TV shows the problem that a share consolidation can be for an unsuccessful company with limited reasons for optimism about its future. However, if a consolidation is done at the right time then the share price will not slump.

UK onshore oil and gas company Union Jack Oil (UJO) had intended to consolidate its shares but it withdrew the proposal at its recent AGM because it decided that it might be better to wait until the business is in a stronger position.

The Motive TV share price has already fallen from 0.38p to 0.28p on the first day following the 100-for-one consolidation. The equivalent share price prior to the previous consolidation was 3.5p, so the shares have declined by more than 90% in fewer than six months. The original flotation price was 10p, or £50 adjusted for the consolidations.

Reasons

There are psychological and practical reasons for a company consolidating its shares. The reason Motive TV had to have a capital reorganisation was that it needs to issue more shares to satisfy the requirements of a convertible loan. A company is not able to issue shares at below their par value. At the time of the original consolidation the par value was reduced from 0.01p to 0.005p a share. However, the share price has been rapidly approaching that par value and, although the par value remains at 0.005p a share, the latest consolidation means that, for the time being, the share price is comfortably high enough to be able to issue shares - even at a discount to the market price.

Some investors are attracted by penny shares and think that somehow their very low price means that there is more scope for them to go up - even though it is about the quality of the company and not the share price. That is why some penny share prices do not fall as far as they might if the share price were higher.

However, there are others that believe that a very low share price is a sign of problems or lack of quality in terms of the business. A company may want to attract smaller investors when it floats but reach a point when institutional investors become the target. Union Jack Oil was considering its consolidation because of this.

Another argument for consolidation is that a higher share price may lead to a narrower bid/offer spread. A share price of 0.5p a share can sometimes have a bid/offer spread of 0.25p/0.75p. In theory a higher share price should lead to a narrower spread but a higher price share can still have an enormous bid/offer spread if it is illiquid so the consolidation does not really tackle the problem.

When there is a low share price a company can end up with billions of shares in issue and this can be unwieldy. If the share price has slumped to its current low level because the company has done badly then it can mean that there are lots of shareholders with shareholdings that are worth little more than a few pounds. These are impractical stakes and many of the shareholders will write them off and ignore them. However, every additional shareholder is a cost to a company. Registrars have to be paid to service the shareholders and sending accounts and documents has historically been a costly business. Printing and posting a glossy annual report could alone cost a few pounds and almost cost as much as the value of some individual shareholdings. As there is more electronic communication these days the costs of additional shareholders are not necessarily as high as in the past but a large number of tiny shareholdings is still an unwanted cost for companies that tend not to be prospering.

An example is software company Sopheon (SPE), which in its latest AGM announcement said that last year's capital reorganisation and consolidation led to "a cumulative reduction of very small shareholdings by approximately 10,000 across the UK and the Netherlands".

Recyclable plastics products developer Biome Technologies (BIOM) had 4,252 shareholders prior to its share consolidation in 2013 but 3,878 of them owned 3.2% of the company and their shareholdings were valued at less than £300 each, while the average shareholding was valued at around £32. There was a 430,000-for-one share consolidation to get rid of these shareholders and then there was a 177-for-one share split - making the underlying consolidation 2,429.4-for-one.

This is the reason why some companies' consolidate their shares and then immediately undertake a share split of the same magnitude. That way they can get rid of the investors with tiny shareholdings but end up with the same share price. Falkland Islands Holdings (FKL) has done this. Shareholders do get paid cash for the value of the shareholding which is a fraction of the consolidated share.

AIM share consolidations

I have identified 56 companies that have consolidated their shares in the past two years or so and the tables show the best and worst performers. There are other companies that have consolidated their shares but are no longer on AIM. Most of these had declining share prices and some, such as Intandem Films (), were in financial difficulties. Serviced Office Group was taken over.

The 56 consolidations include fastJet (FJET) twice because it has consolidated its shares in 2013 and 2015. Motive TV is only included once because there is less than one month since the latest consolidation and other newer consolidations are not included for the same reason.

Only eleven out of 56 companies had a higher share price one month after consolidation. In some cases, the share price had been chased up prior to a deal. An example is digital streaming technology and services provider 7Digital (7DIG) which at one point was even higher. This is still a loss-making business and that is why the initial excitement has subsided. Six of the share prices have at least halved during the month.

Worst performers
CompanyBusinessDate of consolidationRatioAdjusted share price (p)one month change (%)3 months change (%)12 months change (%)
FastjetAviation20/08/201310:1995-33.2-72.1-85.2
Parallel MediaMedia30/12/201324:1129-5.8-10.1-74.8
Hunter ResourcesMining04/07/201410:11.75-16.6-24-74.3
Mercom Oil SandsOil and gas31/07/201450:110-16.2-28.7-71.2
React EnergyCleantech23/12/201350:133.75-6.7-32.6-67.4
Akers Biosciences IncHealth22/11/2013156:1534.3-22.8-34.5-58.8
FinnAust MiningMining02/12/201310:16.45-26.4-34.1-55.3
Tavistock InvestmentsFinancials31/05/2014100:17-17.9-19.6-52.9
QuindellSupport services20/06/201415:1255-24.6-36.7-50.9
7DigitalMedia10/06/201410:132.5-48.8-36.9-45.3

One month is a short period but it does not get much better over longer periods. Share prices will always be affected by the general stock market and sector trends but there does seem to be a tendency towards poor performance. Some of the decliners can be explained by the fact that they are in the resources sector, although many of them are in a poor financial position as well.

Over a three month period the post-consolidated share price fell in 32 out of 47 cases and eight of these had more than halved. There are 32 companies in the table that have one year of trading following their consolidation and 19 of them have lower share prices at the end of the period, including nine that have more than halved, with the other 13 rising.

Share consolidations are not all bad, though. If they are done at the time of a significant deal or when the company is demonstrating that it can grow its business then there is no reason for the share price to fall.

Best performers
CompanyBusinessDate of consolidationRatioAdjusted share price (p)one month change (%)3 months change (%)12 months change (%)
Tiziana Life SciencesHealth24/04/2014300:117.2568.1282.6485.5
OptiBiotixHealth05/08/2014200:111-20.5-8261.4
ReddeFinancials27/05/201410:1583.42.2112.9
MX OilOil and gas01/04/201410:11.2-4.245112.5
ConchaMedia08/04/201310:10.37-18.9-18.973
ImaginatikSoftware15/08/201480:14.8-14-29.653.8
Condor GoldMining26/06/201220:162.578.4157.631.2
Shore CapitalFinancials09/12/201310:1332.50.86.827.8
Palace CapitalProperty21/10/2013100:1242.5-4.15.224.7
Silence TherapeuticsHealth30/04/201350:1207.5-85.88.4

For example, OptiBiotix Health (OPTI) consolidated its shares when the human biome-based treatments developer reversed into AIM shell Ducat Ventures. Initially the share price did slip back but one year later it has more than trebled. OptiBiotix has made progress with a number of products including a potential cholesterol-reducing treatment. There are no financial fundamentals to hold this share price up but the progress has been enough to

Biotech Tiziana Life Sciences (TILS) is another company that reversed into a shell and it did even better than OptiBiotix over 12 months with an increase of 485.5%.

Shares in accident management services provider Redde (REDD), which was previously known as Helphire, doubled in the year after consolidation and this reflects the fact that the previously poorly performing business is recovering and a share placing helped to improve its balance sheet.

A share consolidation is not necessarily something to worry about but investors should carefully assess the underlying state of the business and its financials. If the company is in a weak position there is a good chance that the share price will not hold up.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

have identified 56 companies that have consolidated their shares in the past two years or so and the tables show the best and worst performers.