The life cycle of a business, from idea to incubator, growth, maturity and perhaps, eventually, listed company, is fraught with myriad challenges and many days of reckoning, but the final step of that journey, becoming a listed company can be as problematic as any other stage of the enterprise. 

There have never been more options for a UK business seeking to become a public company. The AIM market, which recently reached its 20th anniversary, continued to mature and a bifurcation between the best and the rest, whilst on the main market a proliferation of funds dedicated to the micro-cap part of the market have started to sprout up, offering another potential route to capital for a fast growth company.

But those routes are dotted with brokers and bookrunners, and a small army of people dedicated to ensuring that all necessary regulatory boxes are ticked before the listing can happen and the capital, for the company and its founders, is unlocked.

One example of such a company is WPP, now a constituent of the FTSE 100, and one of the largest marketing and advertising businesses on earth. This company was originally a maker of plastic and wire products, before production stopped and all assets were sold.

Faster routes to market

But there is another, quicker route to market. This involves buying a cash shell. 

A cash shell is a business that is fully listed on the stock exchange but that does not trade and has no, or very few, actual assets. The sole purpose of a cash shell as an entity is that it be taken over by a private company that is seeking a route to becoming a quoted company.

Whilst cash shells don’t trade, and usual have few tangible assets, the value they hold is that they are already listed and so compliant with all of the regulations that stand behind a listed company.

Many cash shells were once full trading companies but, over time, the trading operations stopped. But the owners retained the listing on the stock exchange in order to wait for a takeover by a private company seeking to go public.

So how does one go about acquiring a cash shell and turning the business they have built into a listed entity in the most efficient way possible?

John Holland, managing director at Holland Bendelow, a company that advises businesses on how to carry out transactions with a cash shell, said that it is a process that needs ‘demystifying’.

He noted that cash shells can be found on AIM as well as ISDX and the Main Market. Between 4 and 8 per cent of the companies on the stock market in the UK at present are cash shells, meaning that there are plenty of options for investors.

He commented, ‘The main reason companies are drawn towards a cash shell transaction is the guarantee that there is already cash available to be used. By contrast, companies using the more traditional route of flotation and undertaking a fundraising have no such guarantee that the required funds can be raised.

‘So in many cases it is the transparency of the cash in the shell that becomes the key driver. A reverse transaction into a listed cash shell provides public company status, in many cases without having to navigate through the formal admission process associated with a traditional flotation. As the company grows following a transaction there is the added benefit of an increased market capitalisation for the company as the share price increases. In most cases a cash shell will have an existing board of directors in place.

‘Depending upon the backgrounds of the individuals involved, these may be useful additions to a reversing company’s board particularly if they have appropriate business sector knowledge or possess the experience of running a company on a public market.

‘Once listed on a UK stock market a company that has joined via a cash shell route enjoys the same benefits as those companies that have joined via a traditional admission route. These include the opportunity to undertake further fundraising on the market using its listed status. Existing shareholders may wish to use the public company status for an exit or partial exit.’

Holland disclosed that there are two types of cash shells, those which are formed from cash reserves and with the sole function of being taken over, which he calls ‘clean cash shells’, and those that were previously trading businesses, but are now shells, he called these businesses ‘dirty’ cash shells.

But Holland was anxious to emphasise that investors should not be put off by the name; dirty cash shells are often just as suitable for investors as clean cash shells, though the putative investor does need to know more information before wading into those waters.

He elaborated, ‘The debts to previous customers, ongoing contracts with existing customers, contractual obligations with suppliers, agreements with banks and other lenders, employee contracts and potential tax liabilities are all factors to be considered.’

He continued ‘In most cases ‘dirty’ cash shell companies will have an existing shareholder base that has been built over a number of years. This can act as a useful platform from which to broaden your company’s shareholding in future.

‘However, it’s worth noting that inheriting a list of existing shareholders in the shell company does not necessarily mean that they will all want to remain investors in the new company following the reverse transaction.

‘For some privately owned companies, using a cash shell route to a stock market listing may provide a less risky and quicker route than the more conventional method of stock market admission and fundraising. In the UK around 100 cash shells are listed across The London Stock Exchange’s AIM stock market and Main Market, and ICAP’s ISDX stock market.

‘The total cash held in listed cash shells in 2014 was £563m with the average shell holding around £5m. Clearly this represents a potentially significant source of funding for the right companies who are seeking both cash and a stock market listing.’

The first steps

Holland remarked, ‘The initial steps are much the same as for any privately owned business seeking equity funding. Take a close look at your own business and assess if you have growth a strategy that may interest the managers of cash shell company.

‘It is unlikely that cash shells will be interested in supporting a transaction if you are not able to provide a strong case for using the cash to enhance your company’s future revenues. To start the ball rolling you will require a professionally written business plan, including financial projections.

‘Ideally you should also include a model which clearly demonstrates how the cash in the shell company would be used and the benefits for your business, and the shareholders of the cash shell company. Often there is only one chance to impress and therefore these documents should be prepared by your company with the support of cash shell professionals. The key issue is to offer the shell the right balance of risk vs reward.’

He struck a cautionary note when remarking that the investor should be aware of the motives of the owner of the cash shells. 

‘It’s important to pay particular attention to the needs of cash shell shareholders with more than 10% stake.

‘In most cases cash shell owners will be looking for the new entity to provide decent capital growth. Cash shells owners are as risk averse as other equity investors and will therefore be more inclined to be attracted to established businesses with a track record of growth. Equally important to them will be the transparency of future revenues your business can demonstrate.

‘Clean cash shells are generally set up as an ‘investment vehicle’, the directors and shareholders of a cash shell are looking for a business, ideally from the same or similar business sector as the background and experience of the directors of the cash shell.’

He added that, before transacting with a cash shell, the business should have assembled its advisers. 

*Holland Bendelow are the UK’s leading flotation and cash shell consultancy, with a successful track record of advising UK and International companies about stock market flotation. We specialise in advising the directors and owners of privately owned pre-float companies considering floating their companies on any of the UK stock markets, including AIM, ICAP–ISDX, The London Stock Exchanges Main Market, and Asset Match.