The appeal of cash shells

Deciding to take your company public at the moment seems as eyebrow-raising a move as streaking at a national sporting event.

A cash shell might offer a more discreet solution. Essentially, a cash shell is a company with not much more than a stock market listing, some cash in the coffers and a director or two. It can provide a less risky route to the public markets than an initial public offering (IPO).

Research from M&A Magazine’s sister publication Business XL has identified 31 such vehicles on AIM and PLUS-quoted, with a combined £48 million of cash on their balance sheets. Although this is 13 fewer than last year and around £63 million less is in the collective pot, reverse takeovers are getting off the ground as traditional IPOs founder, with four such deals on PLUS and one on AIM so far this year.

Although there may be cash on the balance sheets and you won’t have to do the rounds trying to get institutional investors on board, the responsibility and cost of being a public entity should not be underestimated. Philipp Prince, a corporate finance partner at professional services firm BDO Stoy Hayward, warns: ‘Just because you’re getting your hands on the shell company’s cash, and not raising funds and persuading new investors to back you, it doesn’t mean you should forget the marketing.

‘Be sure to test the water and talk to institutions about your business proposition. Although they’re not necessarily investing with you straight off, they will likely track you and may invest in due course.

‘If you’re just looking for the single shot of cash, minus the £500,000 or so of costs of joining AIM, you should remember that you’ll be subject to an increased level of public scrutiny and your share price may well plummet.’

IPOs on AIM fell from 222 in 2007 to just 70 last year as fundraising withered from £6.3 billion to £900 million. Worse, not a penny of new money has been raised on the junior market since November, with only one lonely new listing so far in 2009.

By contrast, of the 16 cash shells afloat on AIM in 2008, five have completed reverse deals, two have taken on operating businesses, two have been bought, five are still on AIM seeking reverse acquisitions and two have delisted but continue their search from their, perhaps temporary, private mooring.

February saw one of the largest ever PLUS deals, as Kuwaiti commercial property company Rafco reversed into cash shell Rak Real Estate with a market valuation of over £600 million, as well as the reversal of £13 million marketing agency dotDigital into West End Ventures.

‘Not a penny of new money has been raised on AIM since November’

Another reversee has travelled a markedly different path. Maritime telematics specialist Marine Track completed a £1.5 million reverse deal into AIM shell XSN last year. The cheerful fanfares of the July transaction – which was marshalled by a team rich in experience, with ex-3i man James Butterfield chairman, former Channel 5 chief executive David Elstein and serial AIM entrepreneur Duncan Lipscombe both non-executive directors – masked a difficult flotation process and marked the beginning of a fraught and ultimately short time on the markets for the company as its sales were crunched by the economic downturn, and the administrators arrived in January.

Lipscombe, whose AIM vehicle Zyzygy was one of Marine Track’s major backers, admits that in hindsight ‘the listing was detrimental for the company’.

‘The problem we had was that the company was poised to go through with a normal IPO in late 2007 but this was just as the Northern Rock fiasco hit the market,’ he adds. ‘So instead we did a reverse into the cash shell XSN but the brokers still had trouble raising money.

‘In the end, all the money that was in the cash shell ended up being spent on the reverse takeover. The product is still very good, it was more just a tale of woe with five different things happening at the same time – with a big order falling through – that meant it ran out of money.’

Although in better times the company might have fared well, Marine Track serves as a deterrent to acting in haste. But don’t let it unduly put you off the cash shell route as many companies have enjoyed a less bumpy journey.

‘In comparison with a normal IPO, a reverse transaction is lower risk,’ says BDO’s Prince. ‘You don’t need to rely on investors to pump in money so in that way it’s easier. Although it shouldn’t be seen as a cheap option, for people who are thinking of doing an IPO, we’ll say the costs of reversing into a cash shell are roughly the same.’

However, the lumps of cash sitting on the balance sheet of most of these vehicles should be an added attraction. Prince suggests that in the current environment, with the markets in the doldrums, prospective reversees may even be able to drive a bargain deal and complete a transaction at a discount to the net assets of the shell: ‘There are quite a few shells out there, so you could push for a valuation lower than market value.’

Such is the plan of the earlier mentioned recent PLUS listing, dotDigital. It reversed into PLUS-quoted West End Ventures, a shell set up by City PR man Nicholas Nelson and with entrepreneur David Pacy on the board, not to mention £806,000 on the balance sheet.

The three founders of ten-year-old dotDigital, a profitable and cash-generative venture which had raised no previous funding, had long charted their development path and felt ready to make ‘the next step’. While many businesses find the listing process disruptive, especially a full-blown IPO with rounds of meetings with potential investors, dotDigital had completed fully audited accounts last year in anticipation of effecting such a deal, with a consultant taken on as a director who could manage the due diligence and reverse transaction full-time.

‘The move was very easy in terms of cost and time compared to a normal IPO,’ says Ian ‘Tink’ Taylor, co-founder and business development director. ‘We still retain control as the shell directors are not interested in being very active in how we run the business, but we get their City experience and skills.’

He and his partners saw the move as a logical progression, having in the last few years been winning ever-larger clients. ‘We were thinking about the next step for the company and, though we were being courted by a number of VC funds, we wanted to retain control so we were sure about the move to a plc. It’s helping the business to grow, helping to recruit and motivate staff [through share incentives] and the equity also allows us to make acquisitions.

‘We chose PLUS as we felt we were slightly under the radar of AIM due to our size, but we see it as a stepping stone. The cash in the business is an added bonus for us. In these economic times, it’s a comfort that we aren’t under extra pressure and it will come in useful for when we need to do any transactions.’

The complete Business XL Cash Shells 2009 report provides information on the number of shells listed on AIM and PLUS, rankings of all shells by cash holdings, and contact details for each shell.

Nick Britton

Lexus Ernser

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...