Buying into cash shells

Cash shells are making a comeback, offering businesses that want to be listed an alternative to an IPO.

Cash shells are making a comeback, offering businesses that want to be listed an alternative to an IPO. Nick Britton reports on new research into the investment vehicles and finds out how to take advantage of them.

Sometimes, the danger of pursuing rapid growth is that you might achieve it. Ila Security, which makes personal security alarms for women, secured an order for 20,000 units from Marks & Spencer just months after the company was established in mid-2008. Unluckily, the world was going through a financial meltdown at the time.

Ila’s CEO Simon McGivern knew he had to act quickly. ‘We had to fast-track the manufacturing by using suppliers in China, and jump through the necessary hoops you have when dealing with any big retailer. It put a massive strain on our working capital,’ he recalls.

Although Ila managed to get products into M&S in time for Christmas, the company was rapidly running out of money, while traumatised banks and panicking investors made the prospects for fundraising look slim. Fortunately, McGivern’s previous experience working for a City brokerage firm suggested an opportunity that many would have missed: reversing into a cash shell.

Alternative route

Reverse takeovers can be seen as the back door to a stock market quote. Rather than go through the usual initial public offering (IPO), a business gets itself acquired by a company already quoted on the market. It’s called a “reverse” because the company doing the acquiring is smaller than its target, which ends up in control of the combined entity. In Ila’s case, as in many reverse takeovers, the acquirer was a cash shell: a quoted company with money in the bank, a board of directors, but no operating business.

Baylon Holdings, the shell in question, had disposed of its last remaining trading subsidiary, tyre recycling business Molectra, in December 2009 and had £650,000 in the bank to offer Ila in addition to its listing on the Alternative Investment Market (AIM). The reverse was completed in March this year after four months of negotiation. McGivern says the AIM listing makes it easier to raise further funds, improves Ila’s profile with retailers and satisfies the company’s seed investors. But he admits the chief reason for the deal was simple necessity. ‘The credit crunch meant that it would have been too difficult for us to raise money any other way.’

Shell storm

While the IPO market is still sluggish, there are plenty of opportunities to pull off reverse takeovers. Research from Business XL, M&A’s sister title, has found 31 cash shells on AIM, compared to 12 last year, with cash resources of £230 million between them, almost six times last year’s figure. That’s not counting the 21 shells on the PLUS-quoted market, which have a combined £11 million in the bank.

Part of the reason for this dramatic resurgence in the firepower of cash shells is that new ones have joined while many of the old guard have stayed on the market. Of the 31 cash shells quoted on AIM and PLUS when this research was conducted last year, only two were successful in completing reverse takeovers. Others have delisted, but the majority remain quoted as investment companies.

‘There are 101 reasons why a shell might not have invested – not finding the right transaction, the state of the markets, disagreements between the directors,’ explains Charles Cannon-Brookes, investment director at AIM-quoted shell Longships, which has been on the market two years and has cash of more than £3 million. ‘In our case, we are still waiting for the right transaction. We’ve looked at a couple of things quite closely that haven’t hit the mark and we are in no particular rush to get a deal done.’

Getting tough

Not all shells can afford to be so laid-back. A change in AIM rules in 2005 meant that all cash shells (formally known as investment companies) had to raise a minimum of £3 million on admission to the market. Those with less than that are now forced to complete a reverse takeover or make substantial investments within 12 months of becoming a shell, on pain of having their shares suspended. This is a major reason why the cash held in the average AIM-listed shell has increased from £880,000 in 2005 to £7.4 million today.

Another reason behind the big jump in the number of cash shells listed on AIM and PLUS is that new shells have kept coming to the market, even when IPOs overall have been scarce. Six of these “clean” shells, which are purpose-built to make investments or conduct reverse takeovers, have joined the two markets since December: namely Marwyn Capital I and II, Sherborne Investors, Q Resources and Digital Barriers on AIM, and Japanese Turnaround Capital on PLUS. In the same period, a “dirty” shell, BWA Group, which is a remnant of ill-fated British World Airlines, gained admission to PLUS, having previously been driven from AIM by the 2005 regulations.

Hidden dangers

For businesses plotting a reverse takeover, not all shells will offer attractive prospects. Many have limited cash (three shells on AIM and four on PLUS have less than £100,000) while others may have liabilities, financial or otherwise, or unhelpful directors or shareholders.

Richie Clark, head of capital markets at law firm Fox & Williams, says the idea that reverse takeovers will offer a quick, cheap and easy route to market is often unrealistic. ‘In my experience, the money in shells is often insufficient, so you have to do a placing at the same time [as the reverse]. That makes the deal much more complicated.’

Even where there is enough cash, the number of parties involved in a reverse takeover makes for a lot of documents changing hands. ‘They are quite enjoyable for a solicitor to do,’ says Clark, ominously.

Peter Simmonds, CEO of dotDigital, which reversed into PLUS-quoted West End Ventures last year, gives a graphic picture. ‘Be prepared to lose three to four months of your life,’ he counsels, adding that preparing an admission document, due diligence (by each party on the other) and inevitable legal and accounting complexities led to ‘a pile of documents about 18 inches high.’

McGivern agrees, adding that the quality and integrity of your advisers will make all the difference. ‘I don’t think any shell is 100 per cent clean. The most important thing for us was having a brilliant lawyer. You need someone who is not going to muck around but you can trust not to bill you every second.’

Caveat emptor

With 52 shells to choose from on AIM and PLUS, it’s important to make the right decision. Clean shells are not automatically preferable: while they may lack the baggage of a failed business behind them, a company reversing into a dirty shell can offset the shell’s losses against profits for tax purposes where it is in the same line of business, which could be a distinct advantage.

The shell’s directors also have the potential either to help or hinder the company going forward. While most board members of cash shells are from a corporate advisory background, with a smattering of fund managers, this is not exclusively the case. Simmonds says the board of West End Ventures included media entrepreneur David Pacy, the founder of MetroVideo Group which he sold to WPP as well as a handful of other businesses in a similar vein. Pacy is now dotDigital’s chairman.

By the same token, board members who are used to dealing with the City could provide valuable support to a company in its mission to be a successful plc. McGivern says Baylon had some ‘sophisticated investors’ on board who had been involved in reverse takeovers in the past, which was a ‘great headstart’ in a complex process. That said, it is not uncommon for the entire board of the shell to resign following the reverse takeover – which may, of course, suit some businesses better than having them actively involved in future.

Acquire or control

According to Cannon-Brookes of Longships, there are two ways shells work. They can either acquire a larger business, in which they end up with a small share (‘so it’s almost a trading opportunity’) or buy into an earlier-stage venture with less liquidity, hold the investment for longer and get much more actively involved post-deal to make the business a success. Both approaches can suit different types of businesses, but it is clearly important to know what you are getting into and what the shell’s directors and shareholders are likely to want out of the transaction.

Clark draws a separate distinction between those shells which are genuinely open to any opportunity within their specified remit, and those which have more than an inkling of the deal they want to do before they list, whether they declare it in their admission document or not. ‘Often there is a connection between the shell and the target company. To find an independent business takes up a lot of time and also cost – and many shells don’t have the resources to do it.’

For this reason, Clark surmises that it’s the monied shells that might be open to approaches. ‘I would say the more money they raise, the more likely it is that they are a genuine, proper investing company that will look at a range of value-enhancing propositions. The ones that are just raising the minimum amount of money are the ones to be wary about.’

For all the caveats attached to cash shells, those who have brought them to market since the credit crunch argue that the vehicles are more useful than ever. After all, access to capital is still limited and investors remain lukewarm towards IPOs. Cannon-Brookes concludes, ‘AIM can still be quite a good place to be, and £3.5 million cash in a clean [investment] vehicle can be an attractive proposition.’


Cash shells – companies with a stock market quote and a board of directors, but no operational business. They are sometimes described as investment companies and can be either “clean” or “dirty” (see below).

Clean shell – a purpose-built vehicle which floated on the stock market specifically to make investments or complete a reverse takeover. On AIM, shells must raise a minimum of £3 million in cash at admission

Dirty shell – the remnant of a failed company which retains its stock market quote and directors but has sold its operating business. On AIM, where a company disposes of all or substantially all of its operating businesses, it must make an acquisition or significant investments within 12 months or its shares will be suspended

Reverse takeover – the process by which a smaller, listed company (usually a shell) takes over a larger private company (the target), but in effect the larger company ends up in control of the combined entity. For shareholders of the shell company, a reverse is a way to invest in the target at a discount, while the target gains the benefit of a listing and any cash the shell may have in the bank. The private company is said to have ‘reversed into’ the public company, while the public company has ‘completed a reverse takeover’

Nick Britton

Nick Britton

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...

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