Looking for life after delisting

With regulation and costs increasing and markets slack, many smaller companies have chosen to delist from AIM. Robert Tyerman reports.

When Oxford-based Phynova, a concern set up to develop prescription drugs derived from Chinese botanical medicines, floated on AIM in 2006, its directors little thought that within three and a half years, it would become the latest company to propose delisting its shares from London’s junior stock market.

Citing a collapsed share price, the inability to access capital via AIM and annual costs of around £200,000 in fees and other related expenses, chief executive officer Robert Miller explains that talks with potential development partners have lapsed and claims the loss-making company would be more fairly valued for corporate deals if it were private.

For long-suffering shareholders, who have seen the value of their investments plunge 97 per cent and now risk being effectively locked in, Phynova directors will consider arranging a facility for matched bargains whenever buyers and sellers can be put together. The company, whose nominated adviser and broker is John East & Partners, says it is still looking for merger and acquisition opportunities.

Phynova is no isolated case. Delistings have become an urgent issue for many companies quoted on AIM. Since the end of 2007, nearly 300 companies have delisted from AIM, which was set up in the 1990s as a market for young companies that might grow into the blue-chips of tomorrow. That represents an attrition rate of more than 16 per cent.

Some companies leave because they have achieved their goals. Others go because it is costly and they can no longer use the market as they had hoped. A number of companies should never have gone onto AIM to begin with.

To be on AIM, businesses must bear total annual costs, including legal and professional fees, of anything from £60,000 to £250,000. They usually need to appoint and pay non-executive directors and spend significant chunks of senior management time explaining themselves to investors and the City. In today’s straightened circumstances, directors must weigh all these costs against the likelihood of being able to use the market to raise capital for expansion – or survival – or to use their shares for takeovers or mergers.

Delistings are of no less concern to investors. They risk a serious loss of value if the companies they have backed abandon their share quotations – unless they offer to buy them out at a fair price – even if some private matched bargain facility is put in place.

If 75 per cent of shareholders approve the move at a special meeting then a company can delist. It may, but does not have to, make an offer for the shares outstanding. Otherwise, a company can obtain a quotation on the Sharemark, which provides daily, weekly, monthly or less frequent auctions in companies’ shares for a £1,500 admission fee and £5,000 annual charge. Regent Inns is a recent Sharemark arrival from the main London Stock Exchange.

Share dealer JP Jenkins offers a matched bargain facility and trades such AIM émigrés as Monstermob, EBT Mobile China and Entelos, charging £4,000 a year plus commission fees. Alternatively, a company can seek to arrange a private matched bargain system of its own.

PLUS-quoted is a cheaper alternative to AIM and several shell companies migrated there when AIM imposed more onerous rules some time ago. But it can have the same or worse liquidity problems and has tightened its own rules.

Deciding to delist

Two of the first companies to list their shares on AIM in 1995 are among those that have lately decided to join the exodus from London’s junior stock market. Entrepreneur David Kleeman has taken the former Fayrewood computer peripherals distributor to Sharemark in a new guise as Letchworth Investments, a vehicle created to take over the company and distribute most of its £30 million cash pile to investors.

‘There is, in fact, no dealing in Letchworth on Sharemark,’ comments Kleeman, ‘because no-one wants to sell.’ His comment underlines the point that, whatever alternative facility is provided, delisting almost always makes shares much more difficult to trade.

Allan Harle, chairman of fellow veteran Formscan, a document-scanning venture which after a turbulent career is now making progress as electronic passport specialist Inspectron, has been seeking shareholders’ approval to delist from AIM. He intends to offer an informal matched bargain arrangement.

Advisers report with relief that the tide is slowing since the spring, when the recession and credit crunch were squeezing companies’ finances and investors’ chequebooks and the deals for which a stock market quote would be useful seemed to have evaporated. Then, the delisting tide looked like turning into a spate, and Birmingham law firm Hammonds began canvassing advisers of the 750-plus AIM companies valued at below £10 million with its new £5,000 streamlined delisting service.

But the flow has not stopped. Investors and companies alike are considering how to live with the various arrangements put in place, willingly or otherwise, to provide some kind of market for their holdings.

Giles Distin of Hammonds says several companies do offer to take out minority shareholders ahead of delisting. He cites Intechnology, which made a tender offer at 35p before delisting last year.

A more recent 2005 AIM entrant, facilities management concern GSH, whose long-standing chief executive officer Colin Tennent left last year, is poised to go private with an ‘off-market trading facility’ at the behest of dominant 84 per cent shareholder Ian Scar-Hall. Pressure from angry minority holders, including Schroders, obliged the company, advised by broker KBC Peel Hunt, to make them an exit offer of 190p a share, which at nearly £2 below the shares’ 12-month high, has left some still smarting with indignation.

Basements for bargains

Another 2005 entrant, Oxonica, a specialist in applied nanotechnology, is intent on leaving AIM, having seen its shares tumble from nearly £1 at flotation to 4.25p today, and confirms cost is an important factor. The company plans to offer existing investors some chance of continuing to trade their shares on Sharemark.

Early last year, Steve Hyde, a former luminary of the Saatchi & Saatchi advertising empire, floated his budding recruitment venture specialising in media, advertising and publishing. He called it 1700 Group, as the number of companies then listed on AIM had almost reached that figure, and raised £1.2 million at 4p with a view to using the company’s paper to make takeovers and do deals.

But the commercial whirlwind then building up, especially in 1700 Group’s chosen fields, put paid to these hopes. One of the biggest sector players froze recruitment and the share price evaporated, as AIM numbers began their descent to today’s 1,413. The company secretary will try to arrange matched share bargains and Hyde hopes to pursue private mergers, perhaps to consider coming back if and when the company can command a value of £10 million.

At Fayrewood/Letchworth, Kleeman, an entrepreneur who is elsewhere trying to revive fallen AIM star Transense Technologies, says, ‘We decided to delist for the right reasons.’ After a boom-and-bust early start, he recalls going for European ‘second line’ companies, ‘where the margins were better’. Citing instances of buying cheaply and exiting profitably, he says City institutions nevertheless regarded distribution as too low-margin and shunned the company.

Kleeman spoke to private equity groups, including, it is believed, Jon Moulton’s Alchemy Partners. But he says they wanted to saddle the company with excessive debt.

‘We could not find a deal and so we went for break up,’ he explains. Fayrewood sold its good investments and offloaded its ‘one dud’, Interface, which went for £1 to a buyer willing to take on its £14 million debts, and was left with between £30 million and £40 million of cash to return to investors.

To avoid tax problems, the board set up a ‘newco’, Letchworth, to ‘bid for Fayrewood with Fayrewood’s cash’ and then moved to delist it. Letchworth will seek to negotiate its way out of extended warranties given on Fayrewood’s corporate disposals or fix insurance cover for the buyers, and directors will then have the company liquidated and distribute the remaining cash to shareholders, whose numbers have shrunk from a peak of 3,000 to 400.

Inspectron, the other 1995 entrant lately to quit, has 700 remaining investors and, says chairman and 42 per cent shareholder Allan Harle, ‘we won’t do the dirty on them’. He plans to establish an informal matched bargain facility, ‘probably on the website’.

After a ‘roller-coaster’ early history, Formscan underwent a transformation when its original technology became unprofitable, but, says Harle, is now making progress as Inspectron, working for governments on electronic passports, as well as special software for tracking. But, he grumbles, ‘we could find oil in our back garden and we’d only go up 1p’.

Once seen as a young companies market, he says AIM now has an ‘inflexible’ regulatory structure. ‘If we wanted to buy a small business for £50,000 to £100,000, it would cost us more than that in lawyers’ fees and it would take from two to eight weeks, by which time the opportunist part of the deal has gone.’

‘We looked at PLUS,’ recalls Harle. ‘But it seemed more of the same.’

‘Delisting has been positive for us,’ says John Cole of retail marketing services specialist Retec Digital. ‘We were too small to get attention on AIM, but now we have cut our large non-executive board, are not spending valuable time on investor relations and can concentrate on our business.’

Bulgarian Land Development floated with private equity backing after a £40 million funding at £1 in 2006 and, with three investors owning 90 per cent, is now offering to buy out minority shareholders at 30p from its remaining £6 million cash pile. Finance director Andrew Daw, who says AIM and attendant expenses cost  £250,000 a year all told, explains that the Bulgarian property boom is over and argues that the offer is better than the outside shareholders could get elsewhere.

That may be true. But it is still cold comfort.


Robert Tyerman

Robert Tyerman was news editor of 'Growth Company Investor'.

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