Snapshot of Jessops shows caution

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.

Regulars will know that the vast majority of the time I take a long-term 'buy and hold' approach but anyone attuned to value should be alert to when and where the market is over-valued. If you are a conservative investor then that can help decisions to sell or avoid - sometimes shares generally, when enough look overblown. More enterprising traders might consider going short or doing something similar via a contract for difference or spread bet, to thrive on downside risk.
 
Bear in mind, some such service providers may limit shorting according to market capitalisation of the share involved so they can hedge the position. Valuation anomalies are also often more acute in smaller company shares although shorting them may need a specialist broker.
 
Whatever your inclination on trading, the FTSE Fledgling shares in Jessops (JSP), the photographic retailer, are a current curiosity. The price has slumped from over 150p in 2006-07 near 1p as the group has lost out to digital photography and become too indebted.

Interims to end-March showed a pre-tax loss of £13.0 million and net liabilities of £26.8 million compared with net assets of £22.3 million a year previously. When these were released at end-May it was also stated: "talks with lenders are continuing but shareholders are unlikely to realise any value from their equity. Nevertheless we are still working with HSBC (HSBA) towards a solvent solution for the business."
 
It took until 28 September for this to be resolved: effectively a substantial debt for equity swap. HSBC will own 47% of a new company which will own the Jessops operating company and the plc in due course is to be put into 'solvent liquidation' with just £100,000 available for the 103 million shares in issue - i.e. 0.097p a share. If this was not to happen then the company would become insolvent with no funds to make any distribution to shareholders.
 
It is useful to clarify that declared terms make this now a classic 'arbitrage' situation. You may have heard this term in bid situations although it is prone to be applied loosely when traders are speculating on a deal happening and its terms. Arbitrage means exploiting an established market anomaly, also judging in takeover type situations what risk may be involved of the deal falling through.
 
Part of Jessops' difficulties is needing higher supplier credit limits to meet stock requirements for the peak Christmas trading period, with suppliers saying they are unwilling to extend the credit limits needed - hence the need to execute a financial solution so the group is solvent for this key period. It is very hard to see how any white knight is now going to rescue Jessops with better terms for shareholders.
 
Despite another warning in the 19 August Interim Management Statement, of no shareholder value being likely, Jessops shares traded at about 2p for much of the summer - but more remarkably, remained at about 1.2p in the market last week after confirmation they are only worth 0.097p intrinsically. There was busy two-way trading too.
 
This may illustrate another aspect to be aware of, in the 'dead cat bounce': how fallen shares may recover, partly as a result of short sellers closing their positions to resolve the trade and move on. It can also lend an opportunity for patient arbitrageurs.

There is a curiosity however in the extent of gap in Jessops' market price from underlying value, at 1.1p to sell. Considering a short trade in terms of the long side, the proposition is similar to saying a share priced at about 10p is in due course confirmed to fetch 110p.
 
Possibly, a game of psychology is going on: long traders are trying to squeeze short sellers out of the market before Jessops shares are suspended. A date has not been set for finalising the 'solvent liquidation' although the legal process should complete later this year then shareholders be returned 0.09p a share.

Being caught short in a suspension might be an inconvenience but not a dead end for any short seller (or broker) worth their salt. They might then contact other shareholders offering perhaps a slight premium to available terms and close the sale contract that way.

In past years this would be done by obtaining the share register, nowadays your broker could have to approach other brokers maintaining nominee accounts - explaining why this tends to be for specialists. There could be a risk, enough holders are resolved not to let a short seller benefit when they are getting next to nothing anyway. This may justify some premium to the 0.09p a share payout but the current extent - over 11 times - looks very odd.
 
So it looks worth investigating whether your CFD or spread bet service provider might engage Jessops for a small trade, despite this being now just a £1 million company. A few short traders are declaring their hand, and bemusement at the situation, on bulletin boards.
 
For long-only investors, Jessops is still a useful lesson in the reality that any heavily indebted company most likely becomes at the behest of its bankers when trading also turns down. You face a high chance of being effectively wiped out and it is situations like this which can set back a portfolio unless you are well diversified.
 
Warren Buffett has historically had the appropriate stance to arbitrage: as an occasional activity alongside primarily being a long-term investor. This has mainly been in takeover situations but if you want to be a well-rounded operator in markets then it is worth keeping an open mind for arbitrage opportunities. Although small, Jessops is illustrative.